InterOffice Memo
To:	Patricia Cini	
From:	Pedro Fernando Manrique	
Date:	October 2, 1999	
Subject:	Power Marketing Credit Risk in Colombia	

Pursuant to our conference call, the following memo has the objective of illustrating the Regulations regarding credit risk in Colombia; the instruments that are in place that mitigate such risks and our overall point of view.
I. Wholesale Energy Market:
Credit pool responsibilities were initially discussed in resolution 24 of 1995 article 11. However, the subject was specifically addressed by resolution 116 of November 6, 1998 and procedures were established. According to this resolution the following is a summary of the main procedures that the pool uses in order to guarantee payments to all its agents:
1.	Any agent in the system,15 days prior to starting transactions in the Wholesale market, should provide promissory notes. Promissory notes should be valid all the time that the agent is participating in the wholesale market. The amount of such notes will be determined by the administrator of the commercial exchange system of the pool. This amount must be suffcient to cover a minimum of all the transactions for the three months after the current month of operations. Operations will include energy transactions, settlements, complementary services, National transmission charges, regional and national dispatch services, and any other payment to be collected by the administrator of the commercial exchange system or the administrator of accounts for the use of the national transmission system.
2.	The administrator will review on a monthly basis the amount of the notes to make sure that all promissory notes comply with Resolution 116 of 1998 Art.2  Par.3.
3.	All existing agents duly registered in the wholesale electricity market will have until March 1st, 1999 as time limit to provide the promissory notes established under resolution 116 of 1998. By December 1st, 1999 all financial guarantees must be in place (Resolution 24 of 1995 had established that any agent should submit financial guarantees to the administrator as a prerequisite to register at the wholesale market). If this is not fullfilled by any agent by the time limits, the agent will be subject to the limitations of supply established in the resolution.
4.	In case of payments default of any agent participating in the wholesale electricity market, the agent will be subject to a Limitation of supply. The execution of the limitation of supply will be coordinated by the National Dispatch Center and the Administrator of the commercial exchange system. However, in order to execute a limitation of supply program, such program must be evaluated and approved by the National Operating Council.
5.	Twenty days after payment default, the administrator will exercise the guarantees and will inform all the agents in the wholesale market and the superintendency of public services. In case of obligations not covered by the guarantee, limitations of supply will be executed using the procedure stated in the resolution. After thrity days of payment default the limitations of supply program will be initiated by the transporter designated by the National Dispatch Center.
6.	Limitation of supply will remain in place until the defaulted agent covers all the obligations originated in the process, as well as all the obigations accumulated after the process was initiated.
7.	In spite of the procedure mentioned above, after the accumulated default of two consecutive or non consecutive invoices, the administrator will excercise the promissory notes so that the debt is recovered via legal procedures.

II. Retail Sales:
Resolution 108 of 1997 determines the criteria of the commercial relationship between the companies and regulated end-users. Unregulated users are allowed to freely negotiate the terms and conditions of their contracts.
1.	Guarantees provided by the end user to secure payments must be included in the contract.
2.	All end-users are allowed to change energy supplier, with the conditions that regulated users must have been at least twelve months with the previous supplier, and are up-to-day in payments. Unregulated users are freely to agree on terms and conditions of the supply, but can not change supplier unless current supplier provides them with a notification of up-to-day payments.
3.	Regulation clearly states that energy may be curtailed after three months of default on payment, prior to advising the local distribution company and/or national transmission system.

III. Financial Guarantees:
Resolution 024 of 1995 Annex C, determines which guarantees are acceptable by the administrator of the commercial exchange system of the pool.
1.	Guarantee fiduciary, in which liquid assets back-up operations in the pool.
2.	Pledge all or part of the revenues to a trust as guarantee.
3.	Bank guarantee, stand-by letter of credit or insurance policy.
4.	Anticipated payments to the Wholesale Energy Market.
5.	Create a fund with the participation of several agents with periodic proceeds from each one of them, on acceptable terms to the administrator of the commercial exchange system of the pool.
6.	Securities previously approved by the administrator of the commercial exchange system of the pool.

IV. Common Practices:
Since the beginning of the Wholesale Energy Market in July of 1995, insurance policies have become the common practice, the following are those designed for the Colombian Energy Sector:
•	Compliance guarantee for operations in Wholesale Energy Market.
•	Compliance guarantees for bilateral contracts.
•	Civil Liability for default on power supply.
•	Civil Liability for directors and administrators.
•	Compliance guarantee for Natural Gas supply.
•	Compliance guarantee for Natural Gas transport.
•	Civil Liability on environmental damages.
•	Business interruption.
However, in conversations with the administrator of the commercial exchange system of the pool (ASIC); they are not approving current insurance policies as guarantees; their evaluation of this type of guarantees is that they do not cover satisfactorily credit risks. Given that most, if not all of the contracts are backed by insurance policies the ASIC has determined December 1st as the date in which all the agents must have guarantees approved by them. 

The sub-comittee for revision and surveillance, conformed by the bigger players and associations that group most of the agents is studying new systems and types of guarantees to comply with ASIC Dec. 1st deadline. On the other hand the ASIC is working on modifying the value of 39.3 US$/MWh set as the value to insure all the operations in the Wholesale Market with a formula that reflects market conditions. We will continue to follow-up on both isssues, and will communicate it to you.

We believe that the electricity market is evolving towards a more secure environment, within clear regulations, new types of guarantees, and new players coming into the sector will encourage the development of the market. The ASIC is aware of the importance of having a strong guarantee system that backs-up efficiently all the transactions of the Wholesale Energy Market, and is working closely with all the agents to develop such system.

The previous summary was excerpted from resolutions 24 of 1995, 116 of 1998 and 108 of 1997. If you have any questions please feel free to call.
 
Regards,

Pedro Fernando Manrique