Tieta, Teresa Batista, Gabriela, Quincas Berro Dágua, Vadinho and Dona Flor. For many of us they are all like family. We heard through their ears, we suffered and enjoyed life with them, we learned to watch the world with other eyes. The man who created all of these people has gone, but his creations, though, live with us for good.
By Brazzil Magazine

There is by now a laundry list of public benefits that have inured to Brazil because of its recent electric energy shortage and consequent implementation of rationing. In Brazil the news remains mostly recriminations. The hard damage is yet to come, or ‘so they say’.

The recent damage that is evident—higher interest rates and slowing growth—are effects of the neighboring Argentine depression and general global economic conditions. Nationalist and populist opposition politicians and press seize on the electric as “incompetent” government management; on the global slowdown, as proof Brazil should turn inward in its economic and institutional development—become “less vulnerable” to global trade and finance. It is as though uncovering electric sector weaknesses and finally giving some substance to distinctions between the economic vitality of Brazil, at least compared with Argentina, was not progress at all.

The most important consequence is not new, but of the type that grows stronger with use. Brazilians gave and continue to give the electric shortage their entire cooperation. Almost everywhere ration quotas have been surpassed. There are three times the rebates for under quota use than there are impositions of ‘super rates’ for non-compliance. Important reservoirs are slowly accumulating depth before rainy seasons even begin because most individual residences have cut usage. Forty four percent of industrial users too met quotas in only the first month, reporting ‘no effects on production’ according to a Getúlio Vargas Foundation report. Business investment plans still show a 6 percent increase for this year over last, only a 1 percent drop from previous reports. All around, citizens are acquiring productive habits they could retain when the rains return to normal. (The awaited cooperative numbers from nature converge at 80 percent of normal rainfall to June of 2002 before rationing can be put aside.)

This evident price sensitivity is giving the sector new inspiration. An industry trade group for investors in infrastructure (Abdib) reports member plans for a new US$ 90 billions in the electric sector through 2004. The political dilemmas that have paralyzed investment have not disappeared of course, but they have been exposed, and hopefully the government will need less political capital to resolve them. Generators and distributors will lose US$10-US$12 billion yet this year and only realistic tariffs can keep them healthy. Aneel, the independent government regulator, has proven itself weak indeed. Decision makers have been appointed politicians protective of consumer votes, pet industries and government generators where most of them used to work. They have been hiding long-standing industry user subsidies behind tough language on privatized distributor rates to placate the same residential consumers who pay double to cover the subsidies.

The wholesale market is still weak but now opinion makers understand competitive conditions can never be introduced into the sector without a strengthened regulatory structure. The two most financially important issues on the regulator’s plate (Aneel’s refusal to pass through the increased costs of Itaipu’s dollar denominated generation and resolution of the so-called ‘Annex V’ clause in distributor franchise contracts) may end-up in judiciary resolution, but no one doubts that increased, more supplier friendly tariffs are necessary if Brazil wants electricity to fuel its handsome desires for economic growth.

Annex V gives a good sense of both Aneel’s importance and its deficiencies. Franchise contracts provide that in the event of rationing, the generation companies will buy back from distributors, on the wholesale market, a percentage of the generated power distributors are under contract to buy from generators. The clause, if enforced, would yield an over US$2 billion dollar relief to distributor cash flow by December. Since most generation is by government owned companies, and since the government is under self-imposed and IMF fiscal pressure to keep inflation controlled, and moreover as the administration is so far without the political capital to carry through on privatization of generation, the resistance within government agencies to living by the terms of the contracts is formidable.

Just as Aneel was unwilling to force Furnas to pay its contractual obligations to distributors under the wholesale market agreement for failure to deliver Angra II nuclear energy, Aneel has been impotent in solving this even more consequential problem. The same kind of endless rounds of government sponsored meetings between distributors and generators, with imminent promised solutions, now take place about Annex V—though this time at the highest Ministry levels. The President of the CBIEE (the electric energy investment trade group) Roberto Lima says, “they [the generators] have to comply with the contractual clause to guarantee the complete opening of the market in 2003. Right now the model is failing. They think they are beyond good and evil. Furnas is only paying the energy for Angra II now that the excess energy is profitable. An affirmed contract can’t be thrown in the trash can.”

The contrast between electric regulation and the performance in the oil and gas sector by ANP is every day more striking. ANP is fed-up with Petrobras. They have studied exhaustively Petrobras performance and conclude, according to its President David Zylbersztajn, that “natural gas” is “the crucial point in breaking the monopoly in the whole line from wellhead to the gasoline station". They have contested Petrobras behavior in the gas sector repeatedly. They have even begun to name names of the gas sector executives who ANP can prove engage in anti-competitive behavior, presumably behind the back of the Petrobras board.

They have referred the recent acquisition by Petrobras of Enron shares in the two Rio gas distributors to CADE, the investigating and enforcement authority for monopoly practices. ANP has effectively exposed to the public how Petrobras defiantly protects gas distribution against even ANP orders as evidenced in the Bolivian pipeline disputes with Enron and British Gas. No one has yet concluded that Petrobras predatory practices in gas retarded the priority program to institute natural gas generation of electricity and was a significant cause of the energy crisis, but the facts are there to support the inference against Brazil’s most popular economic institution, at least for those willing to put nationalist sentiment aside.

ANP is asking that legislation be amended to keep Petrobras out of further bidding on gas distribution lines, including a new contemplated connection to Bolivia. Still not one cubic centimeter of natural gas has yet been consumed in the country except that produced or bought by Petrobras, though BG has announced a 5 percent reduction in their price to consumers anticipating finally, after over two years of hassle, receiving Bolivian Gas through the Petrobras controlled Gasbol pipeline.

If Brazil comes out of its crisis with better competitive conditions in the electric and oil and gas sectors because the electric shortage focused public attention on institutional and regulatory insufficiencies, historians might wonder how else the conditions might have been constituted. In tracking down the enormous slowdown in 2000 by Aneel in letting bids on transmission projects (the major cause of the energy crisis since areas with full reservoirs cannot send energy to deficient regions) one notes that in that year one of the world’s most competent transmission specialists, National Grid, pulled out of the electric transmission business in Brazil while retaining its telephone interests.

In discussing the pull out, executives revealed that the contrast between Anatel, the telecommunications regulatory agency, and Aneel was sharp indeed. Both were seen as technically competent and tough managers, but at Aneel, “things just didn’t get done.” For Brazilians the contrast in the sectors is more concrete: long distance rates to the U.S. are as low as 2 cents (U.S.) per minute, the future in electric is higher rates for the foreseeable future. If generation and transmission had been timely privatized, there might be bright lights even for consumer electric prices.

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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