Bright Idea

Bright Idea

Roseana is the major star of the Party of the Liberal Front,
the trump card the party is playing in
the race for the presidency.
Furthermore, she is beautiful and elegant, well spoken,
and attractive on
a television screen. And she is
the only woman in the crowd of starched, male politicians.

By Brazzil Magazine

Last month, on the upbeat, we reported that the Brazilian electric sector had finally made some faint progress in its
public policy. The issue resolved was about what to do with the new production from newly installed turbines of the giant
hydro generator at Itaipu. Eletrobrás (the government holding company for federally owned electric properties) sought to sell
this new generation on the wholesale market. Distributor-clients protested, believing they were entitled to purchase this
additional electricity on the same pro-rata basis as under their present supply agreements. They initiated suit.

After preliminary court findings favoring distributors, Eletrobrás finally agreed to the distributors’ rights with the
intention of settling this particular distributors’ contractual claim. No doubt Eletrobrás interest in settling was somewhat
influenced by the financial conditions of the distributor clients of Itaipu, as well it should, but more probably it was because it did
not involve immediate cash loss—an ever present element in fiscally responsible government decision-making in the chaotic
world of Brazilian current account deficits and currency devaluations, managed or otherwise.

Forget about ‘that’ upbeat stroke for distributor financial health. A federal judge has just barred that option and held
that the new production is sovereign property of the government to do with as it sees fit. It effectively barred Eletrobrás from
agreeing to such a resolution and issued the appropriate temporary injunction. (No one bothers to count how many injunctions
regulate the electric sector: there are, for example, ones that force distributors to cut service to consumers who exceed their
proper rationing quota, and ones that force distributors to continue servicing those same electric-power-hungry clients).

Unfortunately the uncertainty this kind of ‘deus ex-machina’ intervention breeds is totally inconsistent with the
purposes of a coherent energy sector. Distributors, most with hard currency loan payments, and all with decreasing value in their
real receipts, are in dire financial straits. Since distribution is the only part of the electric sector with significant privately
owned assets, any prudent direct investor cannot avoid observing that even in times of crisis, industrial organization in Brazil is
so incoherent that there can be no firm conclusions upon which any particular new project can expect to project cash-flow,
then follow any coherent investment or borrowing scheme. At least not in electric.

The latest attempt by the government to enforce coherence in the sector (and under pressure from the billions of
financial losses in distributor revenues resulting from rationing) is for the government development bank (the BNDES) to lend
some fewer billions to distributors until new tariff increases can cover these previous operating losses. Is this financial largess
another up beat? Maybe not.

Reportedly the Rio de Janeiro distributor Light will receive the right to increase its rates to consumers even above its
petition to the industry regulator Aneel. How could that happen? Because other billions of historical distributor costs like those
resulting from dollar pricing of diesel oil for generation of electric in remote areas (a cost increasing by over 40% in 2001), and
previously considered particular firm ‘management’ errors and not reimbursable expenses, will
now be calculated and included in the rate regulation process.

New rating decisions, in other words, will take into account past conceptual errors of Aneel regulators that
represented previously ‘unreimbursable’ costs for distributors. Of course stopping the litigation—that had questioned Aneel rate
calculations based on original franchise agreements—is however, part of the
‘right’ to BNDES financing. As well,
distributors must forego the billions government-owned (and other) generators would owe distributors under Annex V of those
agreements because of decreased demand due to rationing. That too will be part of the "temporary" financing package. Every
distributor is a publicly traded company: imagine the nightmare for accountants, analysts and investors, to say nothing of banks
that would like to lend to distributors.

Of course all of this confusion is because the government was following a good plan to regulate and liberalize the
entire sector, but cannot now implement the plan because it cannot get political support for following its own original
evaluative plan to make electric energy a market sensitive to price and other competitive conditions. Regulation of some rates has
already been removed and all electric energy was to be market-priced by 2006.

What is new is instead the realization of the present elected and appointed authorities that the political costs of
risking electric prices to market forces cannot confront (1) the heavy hand of the entrenched interests of Brazilian politicians
in government companies like the vertically integrated Furnas, (2) the entrenched belief of Brazilian opinion makers in
the proposition that important things like consumer price of electricity are better left in benevolent political hands than
trusted to the forces free-prices exert on open markets, and (3) the firm citizen approbation of the opposition political camps that
stand against privatizations and other such "neo-liberal technical" considerations.

We have reported for some time on the legal and regulatory contradictions in the sector. The original round of
privatizations was to be followed by privatizing and decoupling vertically integrated government generators, yet in the 1990’s. No
doubt every firm that invested in privatized assets believed it. Each responsive government official, including President
Cardoso, has now for years reaffirmed that privatizations and sector legal modernization and reform would continue.

But the economic daily Valor published on November 5, 2001, the story that must have been hidden from the public
for many months: the government has no intention of trusting generation to market conditions; it has been developing a
plan to keep long-term government control of generators. The federal executive branch will, in Portuguese, instead
pulverizar (sell non-controlling shares to private investors) Furnas and its Northern federal giant cousins Chesf and Eletronorte. The
plan will, in plain English, pulverize the good chances Brazil has to attract substantial private investment to the electric sector.

Distributors have not shown much interest in the BNDES financing scheme, but most are desperate. Reportedly the
distributor for the State of Goiás has negative cash flow and is behind in payment for Furnas generation. Luiz Carlos Guimarães,
Executive Secretary of the distributor trade group Abradee even suggested on November 6 they "negotiate a moratorium" on
distributor payments to government generators. A Brazilian industry consultant commented on the distributor plight, "they’ve got
their underwear in their hands".

Distributors believe, with good reasons, that only significant rate increases across-the-board, coupled with new
understandings about reimbursable expenses, currency devaluation effects and future regulatory agreement on what Brazil
expects from the sector can keep their operations rational and predictable. But what value will that have if, as is probable,
opposition political thinking will assume control of federal generation in 2002? Their favorite candidate, Lula, has repeatedly
affirmed his distrust of foreign interests. He equates IMF lending rates with "loan-sharking’; think how
‘dirty’ the idea of simple
electric distributor profits must seem when left to the evil of free market pricing?

Humor is the only relief. The São Paulo Minister of Energy, Mauro Arce, who is also an important member of the
"executive committee" organized to deal with "the energy crisis" in Brazil, said recently in commenting on the State’s financial
problems with the CESP-Paraná generation complex (a ‘real’ privatization that had to be cancelled for "lack of investor interest"):
"I’d like some of those political elements that opposed our auction on the premise we were selling too cheap to come around
just now and help us figure out how to service our over US$3 billion foreign debt on the project out of our decreasing and
devaluing income".

The scheduled October auction of the crown jewel of State-owned electric companies, Copel, controlled by the State
of Paraná, which various current investors in the sector called "truly cheap", has also been postponed for "lack of investor
interest". We promise to report on any event that might make the Brazilian electric sector attractive to foreign investment again,
but we are not hopeful; and that, is truly serious for Brazil.

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

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