Bright Idea

The government has no intention of trusting generation
 to market conditions. The plan will, in plain English,
 pulverize the good chances Brazil has to attract
substantial private investment to the electric sector.

Conrad Johnson

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 conrad@alternativa.com.br

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