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 The Brazilian government initiated an 'emergency plan'
to offer investors 49 natural gas generation plants.
Investors did not respond enthusiastically.
The supply terms offered discouraged investment.
By Conrad Johnson
AES Corporation, outside the Brazilian government, is the largest investor in the
Brazilian electric energy sector. President Dennis Bakke announced to the Brazilian press
in mid-May, while visiting its Porto Alegre office in Southern Brazil and reflecting on
the company's more than $6 billion stake, "Brazil has not been a good
experience".
Brazil began liberalizing its economy just before the 1991 Real Plan. Decades of
politics in Brazil valued government as the preferred owner and operator of economic
institutions. The legislative intent that energized the ambitious Real Plan sought to
change that. Troublesome sectors were those that had developed capital-intensive (and
heavily indebted) state and federal firms. Both the financial and the telecommunications
sectors have become more efficient, better democratized, and (at no small cost to the
Brazilian tax payer in the case of banks) populated by economically healthy foreign and
domestic competitive firms. Federal government institutions still control 60 percent of
the banking market, but only a few small and problematic state banks remain. Both
jurisdictions are out of telecommunications, except as regulators.
Somehow the reforms ran out of political steam on the way to creating not just a
competitive, but a competent market in electric energy. Although government companies
control less than 20 percent of distribution, over 80 percent of generation and nearly all
transmission remain in government hands. Privatization of federal properties has virtually
halted. Regulatory authority (Aneel) is in place as though the sector were privatized:
long terms contracts are expiring; the machinery for a wholesale trading is in place; by
2003 large users and in 2005 all consumers are to be afforded choice of suppliers with
free market pricing. But just this month Aneel has assumed control of the previously
private wholesale market. Basic resistance to reforming the system is surfacing publicly
because it is over 90 percent hydro generation and an unanticipated and prolonged lack of
rain is forcing rationing. The sector as a whole is under political strain because of
timid investment. Federal generators report record profits, but can't invest because of
mandated government fiscal restraint.
The government initiated an 'emergency plan' to offer investors 49 natural gas
generation plants. Investors did not respond enthusiastically. The supply terms offered by
Petrobras (the monopoly never intended to be dismembered by the Real Plan) combined with
the pricing of gas and plant machinery in dollars that would be amortized out of revenues
in local reais discouraged investment. Tariffs are adjusted once a year. Since just
January this year the real has devalued 20 percent. The projects are difficult at
best to bank finance. These are the patent reasons the country faces rationing and near
term rolling blackouts. The sector problems go deeper. Deep enough to bring the whole
political economy of Brazilian electric energy into doubt.
Before conception of the 'emergency plan,' AES was building a 600 MW natural gas
generator in very South Brazil (Uruguaiana) that could be supplied by competitive priced
Argentine gas. AES won a 'good citizenship' award in 1999 from the US Commerce Department
for getting the plant running early on diesel to aid Rio Grande do Sul state solve a
seasonal energy shortage. AES bought and operates Tietê, a large generation project, and
Eletropaulo Metropolitana, a large distributor, both in the state of São Paulo. It has
interest in a Rio de Janeiro distributor and the largest state electric company Cemig, in
Minas Gerais (where the governor there has removed them from management by court action).
In addition to other properties they have budgeted plans for 10 more Brazilian thermo
projects. The Presidents of Brazil and AES were scheduled to take part in an inaugural
ceremony May 21st in Uruguaiana. AES has instead cancelled the ceremony and
suspended $2 billion in budgeted Brazilian thermo investments
The Uruguaiana plant was built entirely with company cash. "We have not been able
to secure financing because there is no guarantee that rates will reflect exchange costs
incurred in importing Argentine gas" says President Dennis Bakke. There is little
opportunity to commercialize its production because the South has excess electric energy
and the regional transmission system is not ready to deliver to the energy starved
Southeast (São Paulo, Minas Gerais and Rio de Janeiro). Bakke calls Uruguaiana a
"financial disaster". It is only the tip of the profound disagreements the
privatized energy sector has with regulation.
How decisively dollar costs hamstring the privatized distributors—the likely
investment leaders for increases in generation capacity—is illustrated by present
market conditions. The Southeast is highly dependent on the world's largest hydro
generator Itaipu. Itaipu, co-owned with Paraguay, sells dollar denominated electric
energy. Last July when an Aneel executive
first publicly proposed passing through currency devaluation costs to consumers for
electricity generated burning natural gas, the dollar was at about 1.8 reais. (The
executive was fired). The real recently varies between 2.2 & 2.3. With consumer
rates only adjusted annually distributors are hurting. Earnings statements are low indeed.
(One executive pointed out his firm's earnings were comparable to passbook savings rates.)
Those who have bank and bond debt in foreign dollar loans (the local 'Fed rate' for the real,
the Selic, can't seem to stay under 20 percent) are hurting the most. Worse yet each
distributor is charged a proportional share for the extra national costs of electrifying
Brazil's many remote communities. Diesel is the preferred fuel, also dollar denominated.
These two accounts, Itaipu and remote electrification—based on a distributor
association sponsored study by A.T. Kearney—represent costs absorbed by distribution
companies and not passed through in tariffs such that gross profit margins have decreased
15 percent between 1997 and 2000 resulting in reduced distributor book liquidity of almost
50 percent. Some distributors, including Eletropaulo, have won temporary court relief in
Brasília on these now famous "non-managerial" costs. But Aneel has appealed,
and is publicly committed to not allowing these rising 'currency' or
"managerial" costs to be passed-through. Eletropaulo president Luiz David
Travesso says what Aneel claims are "managerial" costs amount to $150 million
for his company alone over the last two years.
Dennis Bakke faults Aneel for Brazil's imminent "energy disaster". Aneel
"maintains low unrealistic prices for consumers". Bakke offers that Aneel
policies "that don't make clear the methods whereby firms will be remunerated"
have provoked the investment freeze in the sector. "We are no longer investing until
there are clear signs of a solution for the regulatory problem". Instead of partying
with President Cardoso, AES is going to court, this time in Rio Grande do Sul, for an
'extraordinary' 7.7 percent increase in rates to cover a three year 18 percent accumulated
shortfall in "managerial" loses there.
Portions of this article appeared in the Financial Times energy
division publication, Power in Latin America. Conrad Johnson, the author, is an
American attorney, permanently residing in Brazil. He writes for various publications on
development and legal issues in Latin America. You can reach him at conrad@alternativa.com.br
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