Brazzil
March 2002
Energy
And Now?
"New" market prices should be high enough to encourage
private investment and push the
government to invest
in the electric sector, but only to maintain existing facilities.
Conrad Johnson
With rainfall only three percent above normal Brazil's reservoirs and hydro generation capacity are recovering fast. The present supply crisis is over, at least in the absence of an immediate and unexpected drought. According to Mauro Arce who heads the São Paulo Department of Energy and is also a member of the national electric energy crisis committee (GCE—Câmara de Gestão da Crise de Energia) "if present levels of rainfall continue, we will need neither natural gas generation nor emergency diesel and still have yet 10 percent capacity in our reservoirs at the end of the year".
Attention of the GCE has therefore turned to long-term sector considerations. Although means and ends are yet in the discussion phases, the federal executive branch has given clear signs that the model for the electric sector is changing. The government seems committed to governing an electric sector that avoids both future rationing and politically unpopular price increases to consumers.
With recently failed state privatizations in Paraná (COPEL), Goiás (CEG) and São Paulo (CESP-Paraná), the federal government is, for the foreseeable future, retaining permanent control of all federal generation companies while restricting their role in creating new capacity. Given the difficulties these federal companies have created (Furnas in delivery of contracted electricity to the wholesale market, and Eletrobrás defying regulatory rulings concerning new Itaipu generation capacity, e.g.) for advancing self-governance and free market pricing, the federal energy ministry (Ministério das Minas e Energia) and the independent federal regulatory agency (Aneel—Agência Nacional de Energia Elétrica) will now control the prices of federal generators through a new pricing institution (MBE—Mercado Brasileiro de Energia) which will as well replace the MEC , the present wholesale market institution. There is even a strong indication that the non-privatized remaining generation of individual state-owned electric firms will, as well, be price-controlled by these federal institutions.
The clear GCE purpose is to divide the generation market in such a way that there is incentive to create "new" generation capacity that will be left sensitive to market prices, while "old" energy (that produced by already fully depreciated facilities) is priced so as to mitigate consumer rates thereby diminishing overall inflationary effects while still maintaining hydraulic reserves in the event of future drought. The previous plan called for a staged liberation of all prices beginning in 2003, and that has definitely changed. The GCE feared spiraling prices that would have untoward political consequences because of consumer dissatisfaction and effects on the Treasury Ministry's overall (IMF agreed) inflation targets.
"New" market prices are hoped to be high enough to encourage private investment and relieve the government of reason to be an investor in the electric sector beyond maintaining existing facilities. The old state companies will be sold to private individual shareholders after they are separated into separate generation and transmission firms—though, since they are not competing in the "new" market, it is hard to imagine much investor interest for them. If the firms owned by individual states were part of "new" market generation, the division would be something like 47 percent "old" and 53 percent "new". If individual state firm generation is to be controlled by federal regulators, the division will be something like 80 percent to 20 percent.
The GCE is taking note of interested sector criticism. (No doubt optimistic: the Secretary of Energy in the Ministry of Mines and Energy, Afonso Henrique Moreira Santos, responsible for reformulating sector policy unexpectedly resigned over a new proposed subsidy for transporting Bolivian gas, but noted, "I have no support, no resources and no staff".) The most obvious structural criticisms, in the interim, are from free market proponents like Adriano Piers who heads the Institute of Infrastructure Studies at the Federal University of Rio de Janeiro. "What the sector was waiting for was a remedy based more on the laws of the market and less on government intervention," was his response.
Pires points out that under any scenario, the government will own and control a large proportion of total supply of electric energy. How much of federally controlled energy sells, and for what price, will be ever dependent on winning political approval from political interests the governing groups care to please, as well as on how much water should be providently retained in dam reservoirs.
"What changed was the philosophy," he says. "Before we had a self-regulating market, now the market will be regulated by the State. It is not a re-monopolization by the state, wherein it is buying firms previously privatized. The government is proposing a hybrid model in which a large part of generation continues in State hands and distribution is privatized. Federal generation will no longer be privatized. It was a change of the rules in the middle of the game," Pires opined.
Private generation may receive a boost, though skeptics are easy to find. AES, with $US 6 billion already invested in Brazil has announced they are continuing with plans to invest another US$ 1.2 billions in generation, mostly thermo. Several months ago they had suspended further energy investments in Brazil because of "regulatory impasse".
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
