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Debate Goes On
By Brazzil Magazine
The two most cogent reasons for the 50 percent decrease in direct foreign investment in Brazil in 2001 are the world
economic slowdown and the halt in further privatizations of state-owned productive capacity. There are however two other
important lesser reasons: the increasingly likely victory of the socialist labor party (PT) in the 2002 federal elections and
persistent regulatory and legal disputes in the electric sector and more recently, surfacing even in telecommunications. There is, in
the midst of this group of events, a merging consensus among all parties to Brazil's electric sector: change is necessary. The
sector is ever embroiled in dispute, litigation, negotiation, renegotiation, rumor and speculation.
Since the rationing, which began in June, the public has clearly expressed its cooperation by curbing consumption.
Even the gods of rain seem lately less offended; an aspect not to be overlooked when over 90 percent of generated electricity
is based on Brazil's munificent hydrology. But closer to decision-making in the sector itself, the distributors are fighting
with the generators, both are prejudiced by a paralyzed wholesale market, and everyone blames the government.
The regulatory agency responsible for the sector (Aneel) has been effectively relieved of any important policy role
by a "crisis committee" (GCE) that answers directly to President Cardoso; the ineffective administration of the wholesale
market, which has not operated efficiently since its inception, now answers to the GCE. The federal legislature, not missing the
chance to capitalize on unpopular rationing and slowing growth, wants to reassert control over further federal privatizations; the
Ministry of Mines and Energy wants all institutions in the sector to be more responsible to them, though everything they do is too
reviewed by the GCE.
Meanwhile, opposition presidential candidates, with healthy leads in the polls, have vowed to reverse any
federal privatizations, and scheduled auctions for state electric assets have fewer competitors than in previous sales. Many of
the most aggressively investing foreign firms, the American AES, the French EDF and the Spanish firm Endesa have
recently withdrawn from the October 31st scheduled auction of controlling interest shares in Copel, the Paraná state distributor
and generator. The sale of the remaining generation capacity of Cesp, the corresponding São Paulo state company, has been
put on hold because of lack of investor interest.
The common solution for the sector, many claim, is a set of clear regulatory rules that will attract the investment
necessary to increase generation and regularize the relationship between distribution entities, mostly private, and generators,
mostly state-owned and controlled. But clear enforceable rules only do their job when there is widespread agreement on the
results desired. Existing legislation that contemplates the privatization of the entire sector, the phasing in of competitive
conditions and ultimately a free market, has no particular political constituency behind it.
Much of the PT's (Workers' Party) present popularity surge is based on its principled opposition to privatizations,
and most of its organizational strength is drawn from skilled personnel in government controlled companies like the federal
electric generation giant Furnas and the oil and gas monopoly Petrobras. Although the same elected executive administration is
in power that enacted the electric energy sector model, and although it still plays lip service to that model, it has not for
some months taken actions that would promote or enforce the model.
Furnas will certainly not be privatized by the elections in 2002, although as recently as the onset of rationing,
President Cardoso renewed his public commitment to the unpopular objective. To the contrary much has happened, especially
since the advent of rationing, to contradict the objectives implicit in the enabling legislation under which electric energy is
produced, distributed and consumed. Important steps like replacing political appointees with professional managers,
resolving accounting disputes with its parent holding company and with the wholesale market, separating Furnas transmission
division from its generating division and providing for the funding necessary to support its army of well paid retirees have not
occurred.
Furnas is the nation's largest generation firm and additionally commercializes bi-national Itaipu production.
Furnas President, Luiz C. Santos, testified last month before the Brazilian Senate on the controversial subject of enforcement of
Annex V of distributor licensing agreements triggered by 20 percent rationing in most of the country and involving as much as
$US 5 billion in payments by generators to distributors, that "the government has no intention, not by a long sight, to
penalize the generators".
Francisco Gros, President of Brazil's development bank (the BNDES is larger lender than the World
Bank)—responsible for restructuring Furnas for privatization—denied that Santos spoke for the government. But neither did Gros offer any
hope for the negotiations between government, generator and distributor interests. This lack of determination, like many of
the sector's disputes, leaves conflict resolution to slow judicial determinations.
Distributors have had only modest encouragement in recent months and any slow resolution of their problems means
some firms will face failure. They are all unprofitable, facing cash flow problems and some may fall into cash crisis.
Distributor receipts are estimated to be down by an average 30 percent for the year. Most distributor debt is in dollars, so currency
devaluation means not only less receipts in
reais, but proportionally larger debt payments in dollars. AES, the largest foreign
investor in the electric sector has cut by 40 percent its projected investment for Eletropaulo in 2002 and has put on hold, US$ 1.8
billion in gas thermo investment.
More immediately disturbing are new problems in gas thermo generation. An emergency plan for natural gas
generation was expected to contribute to long-term stability in generation and provide the short-term increases that would lift the
country out of rationing. Immediately following inaugural ceremonies for its new US$ 280 million Eletrobolt plant in Rio de
Janeiro it shut the facility down and suspended further investment in another US$ 500 million plant in that state. "We are not
continuing investment in thermo generation without resolving pending regulatory issues in the energy sector", said
Orlando Gonzalez, President of Enron Brasil. In contrast Duke Energy will operate its gas thermo in Macaé, Rio de Janeiro,
"with or without the wholesale market," according to Robert Carter, a vice-president of operations.
All three of the American companies see the resolution of Annex V as one of the biggest impediments to health in
the sector. They see it as threatening contractual integrity. "This type of attitude creates much uneasiness", says Luiz
Mauer, director of governmental issues of Enron in Houston. "It is a cultural question, and depending on how the government
resolves it, it could give bad signs to investors." But they also see no way to sector stability that does not include a
substantial increase in consumer rates. The GCE has admitted to considering as much as a 20 percent increase that would fall more
on industry than on the residential users. On average industrial users pay only one-third of residential rates.
These mounting disputes, especially the repurchase by generators at wholesale rates of distributor contracted
electricity—as contemplated by Annex V because distributors are restricted in their gross sales by rationing—means that
increasing costs must ultimately fall on consumers. An across-the-board rate increase that included settlement of all these
impediments to stability is estimated to be at least 20 percent. But like privatizations, rate increases of that magnitude are sure to have
distinct political repercussions. BNDES recently offered a new program to guarantee distributor bank loans in cases of cash
crisis; but loans alone will not keep the sector healthy until October and November elections in 2002.
The cash needed for operation and the investment funds needed for new generation capacity need a new commitment
by the federal administration to their own original competitive model, even at the risk of losing votes. "It is necessary to
confirm the model and not to create a new one; a lack of regulation is a built-in risk to investment", is how the President of the
Portuguese EDP, Eduardo Bernini phrased it.
"Everyone needs the rain that could bring reservoirs back to tolerably safe levels. Though when that occurs, and
significant new more costly gas generation comes on line, new gas generators with uninterruptible natural gas purchase
agreements with Petrobras, will likely face cash flow problems too: it is not likely that present consumers will return to the levels of
use they enjoyed prior to rationing. Increasing rates could well convince Brazilian consumers to continue indefinitely some
of their new conservation habits.
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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