General. As of April 1, 1998, the regime used to divide domestic and international long-distance revenues between us and the fixed-line companies was replaced with a network usage charge for interconnection, as had already existed for use of cellular networks by the fixed-line companies and for use of the fixed networks by cellular operators. In addition to the network usage charge, we are also required to pay a supplemental per-minute charge called Parcela Adicional de Transição, or PAT, that supplements the network usage charge. We are the only entity that is required to pay PAT charges. We are required to pay PAT charges until June 30, 2001, during which time the charges will be phased out.

Price Caps. Concessions with the regional fixed-line companies and Embratel provide for a price cap mechanism to set and adjust rates on an annual basis. The price-cap mechanism consists of a maximum amount, or price cap, stipulated by Anatel, that may be charged for a particular service and on a weighted average rate for a basket of basic services. The services include all of the services in the basic service plan, such as installation charges, monthly subscription fees, local, intra-regional long-distance, interregional long-distance and international long-distance service, as well as public telephone service and interconnection charges, including network usage fees. The main baskets for the regional fixed-line companies are for local services, including installation charges, the monthly subscription fee, and measured usage charges, and for interconnection services, including network usage fees and equipment rental charges. The main baskets for us are intra-regional long-distance, interregional long-distance, international long-distance and interconnection.

The initial price-cap established by Anatel in the Concession is based on the previously existed tariffs. The initial price-cap will be adjusted on an annual basis under a formula contained in the Concession. The formula allows two adjustments to the price cap. First, the price cap is revised upward to reflect increases in inflation by multiplying the price cap by (1+1(y)), where "y" represents the rate of inflation as measured by the Índice Geral de Preços-Disponibilidade Interna ("IGP-DI"), an inflation index developed by the Fundação Getúlio Vargas, a private Brazilian economic research organization. Second, the inflation-adjusted price cap is adjusted downward to ensure productivity gains by multiplying the inflation-adjusted price cap by (1-K), where K represents a set productivity factor, known as the K-factor.

In order to provide an incentive to us and the regional fixed-line companies to increase their efficiency and to reward consumers of telecommunications services, Anatel applies a K-factor representing annual productivity adjustments to our tariffs and those of the regional, fixed-line companies. During the period from January 1, 1999 to December 31, 2005, the tariffs of Embratel and the regional fixed-line companies will be adjusted downward as follows:

K-Factor Annual Productivity Adjustments:

The price cap covers a basket of basic services. While the weighted average tariff for the entire basket may not exceed the price cap, the tariffs for individual services within the basket may be increased. We may increase the tariff for any individual service by up to 9% for local services and 5% for long-distance services, subject to a downward adjustment for inflation effects already captured in the annual upward adjustments of the overall price-cap for the basket, so long as it adjusts other prices downward to ensure that the weighted average tariff does not exceed the price cap.

We may also offer alternative plans in addition to the basic service plan. For instance, a customer might wish to choose an alternative plan that allows unlimited calling for a set fee rather than pay the per minute fee under the basic service plan. Alternative plans must be submitted to Anatel for approval, but are not currently subject to a price cap. For information on our current tariffs and service plans, see "-Rates".

Domestic Long-Distance Rates. Direct-dial domestic long-distance tariffs are calculated per minute for the first minute and per tenth of a minute for every minute thereafter based on the distance a call must travel, duration of a call, the time of day and the day of the week. As part of the April 1997 tariff rebalancing, domestic long-distance tariffs were substantially reduced, with an effective reduction of approximately 32%. There are currently 20 domestic long-distance tariffs, based on combinations of five distance categories and four day/time categories. For a breakdown of our current domestic long-distance tariffs, see "-Rates-Domestic Long-Distance Rates".

International Long-Distance Rates. Direct-dial international long-distance tariffs are calculated on a per minute basis according to the time of day and the day of the week when the calls are made, the call's duration and the country of destination (nine country groups). For a breakdown of our current international long-distance tariffs, see "-Rates-International Rates".

Network Usage Charges. Other telecommunications companies wishing to interconnect with and use our network must pay certain fees, primarily a network usage fee. The network usage fee is subject to a price cap stipulated by Anatel. The price cap for the network usage fee specified by Anatel varies from company to company based on the underlying cost characteristics of each company's network. The fee is charged on a per-distance and/or per-minute of use basis which represents an average charge for a basket of network elements and services.