The Privatization of Brazil s Electricity Sector

Transcription

1 Special Syndicated Intelligence Report THE PRIVATIZATON OF BRAZIL S ELECTRICITY SECTOR By Dr. Bernardo Kucinski São Paulo, Brazil Latin American Information Services, Inc.* 159 West 53rd Street, New York, NY Tel Fax *Publishers of Lagniappe Letter & Lagniappe Quaterly Monitor and Lagniappe Montly on Latin American Projects & Finance COPYRIGHT 1995 LATIN AMERICAN INFORMATION SERVICES, INC. THIS PUBLICATION IS FOR THE EXCLUSIVE USE OF SUBSCRIBERS. IT MAY NOT BE COPIED, PHOTOCOP- IED, FAXED OR DUPLICATED IN ANY WAY WITHOUT LATIN AMERICAN INFORMATION SERVICES WRITTEN APPROVAL. COPYRIGHT LAW. VIOLATORS MAY BE SUBJECT TO CRIMINAL PENALTIES AS WELL AS LIABILITY FOR SUBSTANTIAL MONETARY DAMAGES. 1995

2 Jornalismo Econômico Ficha Técnica Publicação Original Latin American Information Services, Inc. Autor Bernardo Kucinski Editoração Digital EccentricDuo

3 Contents CHAPTER I: EXECUTIVE SUMMARY A Three-Tier Program...2 Electricity Sector Politics...3 The Regulatory Framework...3 A Preference For Hydroelectricity...3 Reshaping Eletrobras...3 Strong Demand Expected...4 The Regulatory Bottleneck...4 The New Concessions Law...4 Tariff-Setting Rules...5 Tariff Worries...5 The Thermoelectric Option...5 Gas For Sao Paulo...6 Coal For Minas Gerais And The South...6 Gas For The Amazon Basin...6 Independent And Self Production...6 CHAPTER II: THE SCOPE AND LIMITS OF BRAZIL S ELECTRICITY PRIVATIZATION Summary...9 The Broad Game Plan...9 Historical Background...10 The 1970s Tariff Meltdown...10 Long-Term Planning...11 The 1993 Recovery...11 Rules For Transmission...11 Financial Gap...11 Goals Of The TenYear Plan...12 The Shape Of Eletrobras Privatization...12 Rules For Transmission...12 Progress To Date: The Escelsa Sale...12 Selling Off Eletrobras...13 Privatization Bottlenecks...13 Privatization Of State Utilities...13 Sao Paulo s Plan...14 Rio de Janeiro...15 Minas Gerais...15 Privatization Of Individual Plants...15 CHAPTER III THE LEGAL FRAMEWORK FOR ELECTRICITY SECTOR PRIVATIZATION Summary...18 Political And Historical Background...18 Building On Earlier Studies...18 Revising The Constitution...19 Legislative Scorecard...19 Tariff Breakthrough...20 Private Producers Authorized...20 Bringing Paralyzed Plants Back To Life...20 Key Features Of The Concessions Law...21 Concessions Regulations Passed...22 Setback For SelfProducers...22 Constitutional Challenge...22 Environmental Protection...23 Summary Of Principal ElectricityRelated Laws...23 CHAPTER IV THE ELECTRICITY MARKET AND ELETROBRAS PLAN 2015 Summary...25 The Hydroelectricity Bias...25

4 The Power Inventory...25 The Electricity Markets...26 The Demand Side...28 Eletrobras Scenarios...28 Will There Be A Shortage?...29 Integrating National And International Grid Connections...30 CHAPTER V KEY POLITICAL PLAYERS Summary...33 The PFL Profile...33 CHAPTER VI MODERNIZING THE REGULATORY STRUCTURE Summary...36 Historical Background...36 Scant Resources for DNAEE...36 A New Independent Regulatory Agency...37 A Role For The States...37 Call For Consultants...37 Environmental Protection...38 The Gas Regulation Bottleneck...38 Outlook For The Regulatory Reform...38 The Energy Conservation Program...39 CHAPTER VII HOW THE TARIFF SYSTEM IS STRUCTURED Summary...41 Historical And Political Background...41 The New Structure...42 Application Process...42 Protest Against Tariff Tax...43 Tariff Criteria For Public Service And SelfProducers...43 Recasting The Tariff Adjustment System...43 Lower Subsidies...44 Question To Be Resolved...44 The Stabilization Plan Threat...45 CHAPTER VIII THE THERMOELECTRIC OPTION Summary...48 Historical And Technical Background...48 Thermoelectricity Mooted For The Northeast...48 Gas And Coal...49 Urucu Gas For The Amazon...50 The BoliviaBrazil Pipeline...52 Slow Expansion...52 Projects Under Consideration...53 Pipeline Obstacles...53 Outlook...55 Other Thermoelectric Projects...55 The Gaucho Pipeline...55 Southern Coal...56 Supply Agreement Signed...56 The Role Of Thermoelectricity In Plan CHAPTER IX SELF-PRODUCTION AND INDEPENDENT PRODUCTION: A SUMMARY OF RECENT AND UPCOMING PROJECTS Summary...60 Historical And Political Background...60 Legal Considerations...61 Conflicting Goals...61 Tariff Questions...62 Special Legislation...62 Some Winning Bids...63 Transfer Of Power Plants To Consortia...63

5 Other Plants On Offer...64 Concession Confusion...65 Self-Producer Projects...66 New Concessions...66 CHAPTER X A PROFILE OF THE MAJOR ELECTRIC UTILITIES Summary...70 The Ownership Network...70 The Eletrobras System...71 Eletrobras Generators...72 The Privatization Of Light...74 The Sao Paulo State Concessionaires...74 TABLES Investment Requirements, Existing Capacity...26 Projected Additional Capacity...26 Energy Market (1994)...27 Consumption by Sector (1994)...28 Energy Scenarios of Plan Electricity Demand by Regional Participation (Consumption)...29 Rates of Growth of Electric Energy Demand by Region...29 Capacity and Investments Needed to Meet Scenario III...29 Electricity Requirements In the Year 2015, by Sub-Systems...30 Average Tariffs and Share of Energy by Classes of Consumer...42 Residential Energy Consumption...45 Electricity Tariffs in Sao Paulo...46 Escelsa s Proposed Residential Tariff...46 Brazil s Oil and Gas Reserves (1993)...49 Natural Gas Production...50 Bolivian Gas Reserves...52 Distribution of Bolivian Gas...52 Rio Grande do Sul Coal...56 Coal-Fueled Thermoelectric Plants On the Drawing Board...57 Profile of Energy SelfProducers...61 SelfProduction Prospects Under the 2015 Plan (TWh)...61 The 20 Largest State-Owned Utilities...70 State Power Sector Ratios...71 Sistema Eletrobras...72 Eletrobras Financial Return Statement, CHARTS Brazilian States...78 Power System...79 Path of the Proposed Bolivian-Brazilian Gas Pipeline...80 ANNEX I Concession for Exclusive Use Hydroelectric Plants...81 ANNEX II Power Projects To Be Offered in Public Bidding...85 USEFUL ADDRESSES AND TELEPHONE NUMBER...88 GLOSSARY OF NAMES OF KEY BUSINESSES, GOVERNMENT AGENCIES AND COMPANIES...91

6 Chapter 1 THE PRIVATIZATION OF BRAZIL S ELECTRICITY SECTOR Executive Summary

7 Executive Summary Brazil s enormous electric power industry with an asset base of around US$100 billion has been set on an irreversible privatization course. However, the process is expected to take years. The final model will likely be one of mixed ownership in which the states especially retain a great deal of influence. A Three-Tier Program The process has been structured in three tiers. At the top, under the National Privatization Program, is the privatization of Brazil s four large federal power generators: Chesf, Furnas, Eletronorte and Eletrosul, with total assets topping US$39 billion. All four are controlled by federal holding company Eletrobras. Distribution utilities Light, of Rio de Janeiro, and Escelsa, of Espirito Santo, (sold in July to a consortium led by the IVEN group and 11 large pension funds) are also included in the program. The second tier is at the state level, where progress is likely to be sporadic because not all state governors are of one mind about privatization. For example, Rio de Janeiro governor Marcelo Alencar is anxious to proceed and has already asked the state assembly for authorization to auction its controlling stake in Companhia de Eletricidade do Rio de Janeiro (CERJ) and state gas company Companhia Estadual de Gas (CEG). Their combined assets are US$180 million. Sao Paulo state governor Mario Covas is not anxious to privatize, but is being forced to because of financial necessity. The three Sao Paulo state utilities, Eletropaulo, Cesp and CPFL, with US$16 billion in total assets, will be divided into six generating companies, 13 distribution companies and one unified transmission company. Only transmission will remain under state control. The state governments best managed electricity utilities, such as Cemig of Minas Gerais and Copel of Parana, are not slated for privatization. However, they will join forces with private capital because they need an injection of funds to speed up their investment programs. The third level of electricity privatization entails full or partial private participation in individual power plant projects. This process is already going ahead full steam. Private participation is the government s emergency plan to ensure that half-built or paralyzed plants are brought on stream even before the power sector is restructured. Some US$4.2 billion in private capital is needed immediately for this program. Nine half built plants belonging to state utilities and to Eletrobras subsidiaries are on offer as partnerships with private consortia. Simultaneously, the government is pressing ahead with a plan to offer power plant concessions to private developers. Between 1995 and 2004, up to 72 such concessions will be offered in public bidding. A first round comprising seven plants is scheduled for the end of 1995 or early About half of the concessions to be offered were previously held by state government utilities, but were never implemented. President Fernando Henrique Cardoso canceled the state concessions in March Among them are concessions for 10 thermoelectric plants, including six to be fuelled by the Bolivia Brazil gas pipeline, currently in a preliminary study stage. * 2 *

8 Executive Summary Electricity Sector Politics Brazil s electricity sector at the federal level is firmly under the control of the Liberal Front Party or PFL, which is also strongly influenced by some of Brazil s largest building contractors. The PFL is a principal player in the governing coalition, which, of course, also favors privatization. The power technocracy at the state level, however, is very strong, and even following a substantial degree of privatization, it will have a major influence on how power projects are carried out. The Regulatory Framework Under the electricity restructuring program, the Mining and Energy Ministry (MME) is preparing to strengthen state regulatory authorities substantially and also to upgrade the principal federal regulatory agency, the Departmento de Aguas e Energia Eletrica (National Department of Water and Electrical Energy, or DNAEE). The environmental protection agency, Instituto Brasileiro de Meio Ambiente (IBAMA), is also to be strengthened. But skeptical officials do not believe that DNAEE will ever be able to act independently of the large state power companies. Instead the reforms will probably strengthen the influence of regional politicians and state governors on the electricity sector, as well as that of state electricity companies. The new environmental protection policy demands strict obedience to regulations and incorporates a wide range of social, cultural and environmental concerns that would have an impact on power development. The government may soon introduce a Green Stamp, which means no project will be cleared by any government agency unless full environmental protection criteria are met. A Preference For Hydroelectricity The preeminence of hydroelectricity in the power panorama will prevail. More than 38% of the energy produced in Brazil takes the form of electricity, and 93% comes from hydroelectric plants. The economics of hydroelectricity, therefore, dominate and determine pricing policies and the marginal costs of expansion plans. Reshaping Eletrobras The federal government is planning to privatize generation and final distribution, possibly by creating smaller units in order to stimulate competition. Eletrobras subsidiaries will be split into separate units devoted to generation, transmission and distribution. The transmission units will then be regrouped to form a national system that will be kept under government control and will be open to all utilities and consumers. The plan also calls for a two tiered energy market involving long term and spot contracts. Restructuring of Sao Paulo s three state utilities Cesp, Eletropaulo and CPFL is considered a prerequisite for the restructuring of the federal system because of the three companies key position in distribution. * 3 *

9 Executive Summary Strong Demand Expected This report assumes an annual rate of economic growth in the range of 5% to 6%, under the assumption that growth over 6% p.a. is incompatible with maintaining equilibrium in the balance of payments and will therefore be repressed. Under the most probable scenario, with a 5.2% average annual increase in GDP, electricity production will have to treble to 730 TWh by the year Installed capacity would have to reach 74,000 MW by year 2000, compared to 58,686 MW in Thus, the country will have to add 15,000 MW in five years, or 3,000 MW a year. A common rule of thumb is that more than US$6 billion a year in investment is needed through 1999, rising to nearly US$11 billion in the year Following a long paralysis in plant construction, the power sector is now racing against time to meet the need for increased capacity. If GDP expands more than 6%, there could be some stress upon the transmission lines to the states of Santa Catarina and Espirito Santo. Otherwise the system will remain reliable because hydrological conditions continue to be favorable. The Regulatory Bottleneck The absence of a comprehensive regulatory framework and tariff guarantees is the main obstacle investors face as they evaluate involvement in power privatization. The new legislation spelling out privatization and concession rules is still fragmentary, and even contradictory in many aspects. It lacks sufficient guarantees of capital return for private investors. Nevertheless, private companies are anxious to get involved. They are operating under the assumption that the authorities are acting in good faith and simply lack the time to create a comprehensive legal framework prior to actual privatization. They believe the only way to proceed is to take some risks and help to improve legislation so that the final outcome offers sufficient guarantees. In short, the legal environment is considered to be transitional, but heading in a positive direction. Another important gap is the absence of specific legislation regarding the concessioning of natural gas distribution to the private sector, which is now permitted by the constitution. The lack of up to date gas regulations and modern regulatory agencies is the chief obstacle to expansion of gas use on the scale now being proposed. A further complication is that the distribution of natural gas and its regulation are prerogatives of the states. A special law is also needed to regulate private involvement in the oil sector. The New Concessions Law Law 9074, which regulates concessions, was passed in July It is the key piece of legislation that has opened the electricity system to competition and private capital. This in effect has shattered the state electricity sector to an extent still not fully digested. The new law also sets up a definition for independent energy producers, permits them to operate and use the national grid, and allows consumers to shift from one supplier to another. The law requires that all public service concessions or permissions be submitted to public bidding. Concessions must be formalized by a contract * 4 *

10 Executive Summary specifying both the tariff that won the bidding proceedings and the mechanism for revision of tariffs when necessary. All assets must revert to the state at the end of the concession period, but with due indemnization to the concessionaire for assets not fully amortized. Law 9074 was a setback for energy self producers, because it requires them to submit their own projects to public bidding, thus forcing them to offer a premium to win the bid. Moreover, the law may prove unconstitutional on a particular point that benefits self-producers that of allowing land appropriation for projects not destined for public service. If this turns out to be the case, self-producers will face another degree of uncertainty that will further hamper their projects. Tariff-Setting Rules A new tariffs law gives each concessionaire the responsibility for calculating its tariff, according to an established formula, and a mechanism for periodic revision. The parameters were determined after a national independent costs audit. Concessionaires must specify their tariffs in the concession contract. Applications for tariff readjustment can be filed at any time, depending on changes in costs. The tariff-setting formula must be revised every three years, and can be revised earlier if there are exceptional grounds. Energy supply contracts between companies must be approved by DNAEE. Concessionaires of public services are required to create a consumers council made up of representatives of all types of consumers. The council will monitor and evaluate tariffs and quality of service. Tariff Worries There is great concern that the new tariff legislation could be aborted in the future by one of the economic stabilization packages that have become regular instruments of Brazilian economic policy. Typically, these packages suspend legal contracts for lengthy periods. They are considered by the courts to be legitimate government acts, taken in the national interest. The most recent stabilization package is the Real Plan, launched in March The plan gave the finance minister exclusive power to determine tariffs, which were then kept frozen for more than a year, despite 2% 3% monthly inflation. An additional source of concern is the absence of comprehensive legislation concerning charges for independent producers use of transmission lines. The Thermoelectric Option Brazil s energy system depends heavily on hydroelectric energy and on oil derivatives, with negligible use of natural gas (currently 1.9%) and coal (3.6%). National energy secretary Peter Greiner has recommended increasing the use of gas and coal in order to make the system more diverse. However, efforts to increase production of thermoelectricity are hampered by longstanding preferences for hydroelectricity. Presently, an additional 14,600 MW of untapped firm hydroelectric capacity is available at less than US$40/MWh, including long distance transmission costs. Energy could be imported from the Amazon basin (transmission costs * 5 *

11 Executive Summary from the Amazon basin would add only US$16 to the MWh cost), and Eletrobras has concluded that total hydroelectricity costs are competitive with thermoelectricity. Despite these calculations, which manifest the power sector technocracy s preference for hydroelectricity, the Southeast will need supplementary thermoelectric energy at some point in the future. Gas For Sao Paulo In Sao Paulo, gas from the proposed Bolivia Brazil pipeline could be used to generate electricity. However, several unsolved differences block the launch of the pipeline project and the general expansion of gas usage. For example, Sao Paulo state utility Cesp is against the proposal put forth by Enron to establish a 1,600 MW thermoplant that would be the anchor for a gas-powered system. Another complication is the Brazilian authorities desire for the final price of gas to be the same at all city gates along the pipeline to Rio Grande do Sul. But an equalized gas tariff on the Sao Paulo Rio Grande do Sul section of the pipeline doesn t make economic sense at this stage. However, Bolivian gas will almost surely be used in Mato Grosso. Coal For Minas Gerais And The South Minas Gerais utility CEMIG has signed an agreement with Southern Electric to study construction of one or more thermoelectric plants fed by imported coal. They would total about 2,200 MW and be located along the Belo Horizonte Vitoria railway. The key to the project is to use the return idle capacity of the iron ore export corridor, meaning the trains and shipping facilities that routinely carry iron ore for export. This corridor can handle 6 million tons of coal a year. In the South, Eletrobras has signed a protocol with coal producers for a set of nine power plants, to ensure supply at prices compatible with the marginal cost of the electric sector expansion plan. The low quality coal is feasible for use in fluidized cold bed plants. The nine units were chosen among several already on the drawing board, totalling 4,630 MW capacity. Gas For The Amazon Basin In the Amazon basin, there is room for many small thermoelectric plants to be fuelled by the Urucu gas reserves, especially if the plants are not located along the route of the proposed Tucurui Santarem transmission line. Plans for the Urucu and Jurua gas reserves involve liquefying the gas at minus 162 C at the town of Coari, close to Urucu, and then transporting it by cryogenic ships to Manaus and Porto Velho. The estimated cost is US$1.80/BTU. Independent And Self Production Feeling pressure from higher tariffs and alarmed by the prospects of an energy shortage, large energy consumers and energy intensive industries are turning to strategies of energy self sufficiency. Mining companies, such as Samarco, plan to get most of their energy from self production by the year Even second rate hydroelectric sources of which many are still available in the Southeast can provide electricity for self supply at * 6 *

12 a competitive price. Self producers have the advantage of not needing government tariff guarantees. Numerous medium sized sources of hydroelectricity are located in the state of Minas Gerais, close to the big mining companies and steel mills, and thus offer the perfect combination for self production projects. CEMIG is far ahead of other state companies in financial reorganization, promoting joint ventures with the private sector and negotiating adequate arrangements for the use of its transmission grid by self producers or independent producers. To date, DNAEE has received 97 applications for concessions for self production of energy, totalling 6,165 MW of installed capacity. The applications were filed before the new concessions legislation was passed. Therefore it is unclear if these applications have to comply with the new legislation requiring them to submit to a public bidding process. Most concessions range from 50 MW to 120 MW, but several are on a much larger scale. Nearly half of them 42 concessions are located in Minas Gerais. Mato Grosso comes in second with 13 concessions. Executive Summary * 7 *

13 Chapter 2 The Scope And Limits of Brazil s Electricity Privatization

14 The Scope And Limits of Brazil s Electricity Privatization Summary The privatization of Brazil s US$100 billion electricity industry is irreversible, but any substantial change in the nature of industry ownership is expected to take years. The process will take place on three levels: federal (Eletrobras), state (with many participants), and specified individual plants, all with varying mechanisms. Most of the game will be played only by very big operators. Still, there are opportunities of every possible size. The bulk of the federal utilities will be privatized only after a radical reorganization and regrouping by area of activity and by river basins. The federal reorganization also depends on the state of Sao Paulo following the same process. Political resistance is subsiding on the left, but is tending to increase among governors of Northeastern states, who control their states electricity sector machinery. A core of strong and well managed state government utilities, such as Cemig of Minas Gerais and Copel of Parana, will resist privatization. The gigantic and badly managed Sao Paulo state utilities Cesp, CPFL and Eletropaulo have no alternative but privatization. The lack of regulatory structure and tariff guarantees are the chief obstacles to a more rapid privatization process. But private groups are taking risks, assuming that regulation and guarantees will be strengthened along the way. The legal environment is considered transitional. The final model will probably be one of mixed ownership, and the well-entrenched electricity technocracy at the state level will likely prevail in conflicts of interests for a long time to come. The Broad Game Plan The privatization of the electricity sector is part of the federal government s general move to restructure itself, transferring productive activities to the private sector to reduce indebtedness and improve efficiency. The drive to privatize the electricity sector began when lower levels of the state apparatus began to have to cope with very urgent needs, such as completion of paralyzed power plants. The privatization process is divided into three tiers. At the top is the privatization of the large federal utilities that are under the control of government holding company Eletrobras. This level is only for very strong players. The second tier belongs to the state utilities. Two states are following the federal plan of privatizing utilities that are under their control: Rio de Janeiro announced it will privatize its state electricity company (Companhia de Eletricidade do Rio de Janeiro, or CERJ), and Sao Paulo will privatize most of the generation and distribution sections of its three utilities CESP, Eletropaulo and CPFL after splitting and regrouping them. The restructuring of the three Sao Paulo utilities is considered a precondition for the restructuring of the federal system. By contrast, the state of Minas Gerais will keep control of its utility, Cemig, but it has pioneered the sale of power plant concessions to joint ventures with private consortia. Concessions will also be a game for very big players. At the third and lowest level, there are many privatization proposals with limited scope that are less risky and only indirectly dependent on the reshaping of the power system. Among them are privatization of specific power plants of all possible sizes, small, medium and very large, * 9 *

15 The Scope And Limits of Brazil s Electricity Privatization some of them half built, others still on the drawing board. Nine half built plants belonging to state utilities and to Eletrobras subsidiaries are on offer as partnerships with private consortia. These range from the 1,814 MW Porto Primavera, a CESP concession, to the 45 MW Cubatao, a Celesc concession. (See Chapter IX, Self Production and Independent Production: A Summary of Recent and Upcoming Projects. ) Seventy-two concessions are set for public auction under the new concessions law that allows private groups to bid. There will be about five auctions per year, beginning in (See Annex II.) Historical Background During the 1960s and 1970s, more than 200 federal and state companies were created in Brazil to promote economic development. Among them were the giant federal holding companies Eletrobras (electricity), Petrobras (oil) and Telebras (telecommunications). In 1973, congress passed Law 5899, which granted Eletrobras regulatory and planning authority. Law 5899 also set quotas for how much electricity utilities were required to buy from the Itaipu Binational facility (co-owned with Paraguay), through Furnas, the Eletrobras subsidiary that operates Itaipu. In early 1990, congress passed President Fernando Collor de Mello s national privatization program, which became Law The law designates the National Bank for Economic and Social Development (BNDES) both to run the privatization process and to manage the country s privatization fund, in which shares of the state companies to be privatized were deposited. By September 1995, 37 companies had been privatized under the national privatization program, including the entire government steel sector, the fertilizer sector, petrochemicals, aircraft manufacturer Embraer, and Escelsa (the state run distribution company in Espirito Santo), the only electricity utility privatized so far. In February 1995, President Fernando Henrique Cardoso proposed that all public services be included in the privatization process. Congress approved the proposal as Law 8978, which regulates private participation in public services. Espirito Santo distributor Escelsa and Rio de Janeiro distributor Light were designated for privatization. Subsequently, President Cardoso included the four major Eletrobras power generation subsidiaries in the national privatization program: Furnas, Chesf, Eletronorte and Eletrosul. There are now 25 companies being evaluated for privatization, including Light and the four Eletrobras subsidiaries. The 1970s Tariff Meltdown The key factor in the decline of the government run electricity sector despite a tradition of technical quality was the decision taken in the 1970s to hold down tariffs. Until the 1960s, tariffs were based on a basket of values that included the prices of gold, the US dollar and oil. Then, after a period during which tariffs were based on producer costs, the government introduced a national equalized tariff, taking the large profits from the low cost utilities and transferring them, through a compensation account, to the higher cost utilities. But when the government decided to fight inflation by holding down the national equalized tariff, the utilities became insolvent. In 1993 the national equalized tariff was abolished, and an estimated US$24 billion was injected into the utilities by settling the compensation account. * 10 *

16 Long-Term Planning During Brazil s long period of economic stagnation, from 1981 to 1991, capital investment plummeted from 25% of GDP to 14% of GDP. Investments in power plants were virtually halted. In 1986, Eletrobras unveiled its long term Plan 2010, in an attempt to plan investment until that year. Forecasts called for demand to grow from TWh, in 1986, to TWh in 2010: a 5.7% compounded annual rate of growth. Installed capacity would have to grow from 42,700 MW, in 1986, to 160,000 MW by The plan also forecast more energy transport between the North and the Southeast. Electricity shortages were only avoided because the stagnation in investment was matched by stagnation in economic activity. The 1993 Recovery When economic recovery began in 1993 and GDP resumed an average annual growth rate of 4% 5%, Eletrobras once again turned its attention to the urgent need to expand the power supply. Plan 2010 was revised to Plan This was also revised in (Within the 20 year plan is a 10- year plan that was also revised in 1995). Scenario III in Plan 2015 is now considered the most probable. (See Chapter IV, The Electricity Market and Eletrobras Plan ) Scenario III predicts that GDP will grow by an average of 5.2% p.a., and that Brazil will need 560 TWh by the year 2000, rising to 730 TWh by the year Installed capacity would have to reach 74,000 MW by the year 2000, compared to 58,686 MW in 1995 (including turbines still being The Scope And Limits of Brazil s Electricity Privatization * 11 * installed). Total need would be 15,000 MW in five years, or 3,000 MW a year. In 1995 the Cardoso administration introduced laws that specifically regulate private sector participation in the electricity sector. (See Chapter III, The Legal Framework for Electricity Sector Privatization. ) Simultaneously, President Cardoso won congressional approval to revise the 1988 constitution to eliminate rules that accorded preferential treatment to domestic capital. Rules For Transmission Also in 1995 the National System for Transmission of Electrical Energy, or Sintrel, began to be conceived. In August, the principal regulatory agency for electricity, the Departamento Nacional de Aguas e Energia Eletrica (DNAEE), completed its first draft of a method to set Sintrel s tariffs. The proposal calls for transmission tariffs to vary according to distance, duration of the contracts and average duration of the concession. Values being mentioned vary from US$1.1 per MWh to as much as US$12 per MWh. In the Serra da Mesa contract with the private sector, transmission costs will vary from US$1.1 to US$5.48 per MWh. Financial Gap The rise in tariffs permitted in 1993 will add an estimated US$800 million to utilities revenue, but the amount is still considered insufficient to finance development. The government hopes to attract some US$2 billion in private capital per year, out of the total US$7-9 billion a year

17 The Scope And Limits of Brazil s Electricity Privatization needed for the plan s first phase and the US$11 billion a year needed beginning in the year The state power companies, burdened by heavy debt, have only about half the funds they need to stay on schedule. Goals of the Ten Year Plan The latest revision of Eletrobras Ten Year Development Plan, unveiled in July 1995, is based on Scenario III of Plan 2015, predicting average annual GDP growth of 5.2% and calling for more than US$23 billion in investments during the first four years alone, as follows: INVESTMENT REQUIREMENTS, (US$ billions) Power production 1,940 2,713 3,214 3,390 Transmission 1,472 2,027 1,766 1,664 Distribution 824 1,119 1,044 1,106 General Installations Total 4,506 6,233 6,408 6,665 Source: Eletrobras By 1999, US$10.4 billion total investments will be needed, rising to an average of US$11 billion a year during the following three years. The Shape Of Eletrobras Privatization To allow competition into the generation business and at the same time assure the neutrality of the transmission grid, Eletrobras plans to split its subsidiaries into separate units dedicated to generation, transmission and distribution. The government wants to privatize generation and final distribution, possibly in smaller units to keep any one generator from dominating a wide region, and also to facilitate a sell off. Some of the assets are too large to allow for a smooth sale. Rules for Transmission The units dedicated to transmission will then be regrouped into a national system under the control of a branch of Eletrobras. The system will treat all generators equally, charging a tariff for energy transportation and eventually an administrative fee. Large scale consumers will be in position to sign long term contracts with suppliers offering the lowest tariff. An additional spot market will take care of fluctuations on both demand and supply needs. Though the market plan seems adequate, there are still many reservations concerning its actual operation, and many technical difficulties to be overcome. Progress To Date: The Escelsa Sale Espirito Santo state utility Escelsa was the first state utility to be sold. It went on the block in July 1995 and was bought by a consortium of 11 large pension funds and the IVEN group, whose main partners are the * 12 *

18 The Scope And Limits of Brazil s Electricity Privatization Brazilian banks Pactual, Nacional and Bozano. They outbid the equally strong Power consortium led by Chase Manhattan Bank. The final price paid for the controlling share of the company s stock was US$370 million, which was 11.8% over the minimum price. The next federal utility to be privatized is Rio de Janeiro s Light Servicos de Eletricidade, which is 10 times larger than Escelsa. Light s assets and structure are undergoing evaluation. Privatization is still scheduled for However, there are doubts that a privatization of this size and complexity can be achieved this year. (See Chapter X, A Profile of the Major Electric Utilities. ) Selling Off Eletrobras The four main Eletrobras subsidiaries to be privatized are gigantic companies with close to US$50 billion in total assets. In contrast to distributors Light and Escelsa, they are also active in power generation and long distance transmission. Eletronorte has US$16 billion in assets, Chesf has more than $14 billion, Furnas has $13 billion and Eletrosul has $6 billion. However, the valuations may completely change after the government splits the power generation activities from distribution and long distance transmission. The four giants were already nominally included by presidential decree in the national privatization program, but it is estimated that auctions will not start before a year s time and that the whole process will take three years to complete. According to preliminary plans, the nuclear facilities and the Itaipu partnership, established by international agreement with Paraguay, will remain under Eletrobras authority. Privatization Bottlenecks Because it will promote competition among power generators, the Sintrel transmission system is being resisted by large, inefficient utilities, particularly CESP and Itaipu. There is also a fundamental contradiction between the compulsory purchase quotas for costly Itaipu energy, under Law 5899, enacted in 1973, and the Sintrel. Private companies will be reluctant to invest in independent production if the rules of access to Sintrel, including tariffs, are not clearly defined and guaranteed by law. The Itaipu purchase quota does not apply significantly to self production. The other main obstacle to full scale privatization of the federal system is the lack of a wider and clearer regulatory framework. State authorities are concerned that there is no broad system of laws defining private companies responsibilities toward the environment and addressing how public services are to be provided in complex situations, such as when a hydroelectric company has to provide both water supply and navigability, which is often the case. Private companies also fear that the government will not stay firmly behind the program and that the tariff system will wobble. (See Chapter VI, Modernizing the Regulatory Structure. ) In practice, the private sector is entering the process on a case by case basis and hoping that as the sector becomes increasingly privatized, it will gain strength to resist politically motivated efforts to manage its affairs. Privatization Of State Utilities The three largest industrial states Sao Paulo, Minas Gerais and Rio de Janeiro have electricity privatization plans similar to that which the * 13 *

19 The Scope And Limits of Brazil s Electricity Privatization federal government is considering for Eletrobras. Sao Paulo s utilities play such a key role in the national system that their privatization is considered a prerequisite for the privatization of Eletrobras subsidiaries. All three states are heavily in debt and need to privatize a substantial part of their electricity sectors to be able to invest in other kinds of development projects. For example, Sao Paulo state s liabilities shot up from US$37 billion in December 1994 to US$48 billion in August 1995, of which US$14.5 billion was pure financial debt. With public servants salaries consuming up to 80% of the state budget, there is no way out of the crisis but to sell state property. Most state governments finances are afflicted with the same types of problems. Privatization of state utilities was also motivated by the federal government s January 1995 ultimatum for 18 state concessionaires to repay an estimated US$1.75 billion in debts incurred to Eletrobras or face nonrenewal of their concessions. Most of the debts stem from nonpayment for federally generated energy in Sao Paulo s Plan Sao Paulo is developing two separate privatization schemes. The first is the straightforward sale of a stake in CESP s Canoas I II and Porto Primavera hydroelectric facilities, to pay part of the state debt to stateowned bank Banespa. The plants may even be sold outright to Banespa. However, the plan has problems stemming from the difference between Porto Primavera s value, estimated at US$3.5 billion by state energy secretary David Zylbersztajn, and the plant s accumulated US$5.9 billion in costs to CESP. The costs are due to corruption, overbilling and construction delays. Indications from the market are that Zylbersztajn s US$3.5 billion estimate is too high. The government is committed to absorbing the difference, possibly by paying CESP with long term state bonds. The state would then hand over the plant to Banespa at market value, and Banespa would privatize it. Porto Primavera needs another US$1.8 billion to be completed. It has 1,800 MW installed capacity and could begin operations at the end of The Canoas complex is worth US$300 million to $400 million, and will be transferred directly to Banespa. Far more broad and complex is the Sao Paulo state government s second scheme: a restructuring of the electricity sector, under which most of the state power companies, including CESP, would be privatized. Under this plan, the three Sao Paulo state holdings, (Eletropaulo, CESP and CPFL), with US$16 billion in total assets and an estimated US$12 billion in long term debt, would be decontaminated of their liabilities, such as overstaffing and overindebtedness, and split in into six generating companies, 13 distribution companies and one unified transmission company. Transmission would remain under state control. The smaller generation and distribution companies would theoretically have clearer operational and geographic identities and would also, in principle, be subject to privatization. The plan also calls for a state holding company to be created to administer state participation in the various companies, as well as to coordinate overall state participation in the electricity sector. The newly privatized companies will issue golden shares to be held by the state holding company. The golden share in effect grants the state veto power * 14 *

20 The Scope And Limits of Brazil s Electricity Privatization that would enable it to ensure satisfactory public service and compliance with regulations concerning public land use. In addition, the state energy regulatory agency would be upgraded. The restructuring privatization will take at least two years. First, the plan must be submitted to the state assembly, which is still expected to happen in Then there must be considerable internal reorganization. By early September 1995, there was already significant progress in trimming the employment rolls: of the 52,236 jobs in the state power sector (including state gas company Comgas, also subject to reorganization), 8,420 had been cut. Nearly 400 administrative functions were eliminated. Governor Mario Covas nominated a team of very young administrators to carry out the changes under the direction of energy secretary David Zilbersztajn, who also happens to be President Fernando Henrique Cardoso s son in law. Rio de Janeiro Privatization has become the core of Rio de Janeiro governor Marcelo Alencar s strategy for the state. He is sending a proposal to the state assembly for privatization of most public services and the sale of state owned stock in most companies. He hopes to make more than US$2 billion by privatizing all large state enterprises (including the utilities), selling the state s controlling stock in Banerj as well as the petrochemical pole, the public transport system and other public services. Plans call for auctions to start this year. First will be state electricity company CERJ, in a straightforward sale of the state s 70% stake. State gas company Companhia Estadual de Gas (CEG) will also be offered to the private sector. Minas Gerais The state of Minas Gerais is in a privileged position, with a booming economy and only US$5.4 billion in debts. Its utility, Cemig, is one of the country s best administered companies. Cemig has longstanding links with the private sector, and is already seeking private partnerships to develop hydro and thermoelectric facilities, to get help for the large investments needed and to improve efficiency. The state is going through a period of modernization and is developing close ties with multilateral development agencies. Though there are no plans for the outright privatization of Cemig, Minas Gerais governor Eduardo Azeredo has asked the state assembly s permission to sell 31% of the company s voting stock. Since the state has 84.25% of the voting stock, it will keep control of the company. Privatization Of Individual Plants Partial privatization through partnerships or leasing contracts is an emergency solution devised to facilitate the completion of paralyzed plants before the electricity sector s new format is designed and agreed upon. About US$4.2 billion in private capital is needed immediately to complete the plants already started, not including Serra da Mesa, Igarapava and Ita, which are already in the hands of private consortia. The most important plants to be privatized under the partnerships/leasing plan are: thermoelectrics J. Lacerda IV, Jacui and Candiota III and the hydroelectric Cubatao, all in the South; hydroelectrics Porto Primavera, Canoas I and II, and Miranda in the Southeast; thermoelectric Corumba I in the Central West region; hydroelectric Manso and thermoelectric Maua, both * 15 *

21 in the North. (See the complete list in Chapter IX, Self Production and Independent Production. ) Many other projects can be developed under the partnership/leasing scheme. Cesp, for example, has given up a series of very small hydroelectric projects that could easily be taken over by private companies. DNAEE is already facilitating private partnerships in concessions for plants that are halfway to completion by extending the concession periods. The Scope And Limits of Brazil s Electricity Privatization * 16 *

22 Chapter 3 The Legal Framework for Electricity Sector Privatization

23 The Legal Framework for Electricity Sector Privatization Summary Legislation affecting privatization is still fragmentary, and in many aspects contradictory. Capital return guarantees for private investors are insufficient. Specific legislation has not yet been enacted for gas distribution concessions to the private sector. Laws are also needed to regulate private sector activity in the oil industry. During the next two years, congress is expected to pass additional legislation to fill the gaps and clarify contradictions. In the meantime, companies are operating under the belief that the authorities are acting in good faith, that they simply lack the time to create a comprehensive legal framework prior to the start of the privatization process, and that the only way to proceed is to take some risks. By being participants in the system, they hope to be in a position to help improve the legislative framework. Political And Historical Background Brazil s electricity legislation stems from the 1934 waters code, which holds that all rivers and bodies of water belong to the federal government and which gives priority to public use. The federal government has exclusive authority to grant concessions, through the Departamento Nacional de Aguas e Energia Eletrica (Department of Water and Electrical Energy, or DNAEE), the principal regulatory agency for electricity (see Chapter VI, Modernizing the Regulatory Structure ). During the period of intense statism of the 1960s and 1970s, substantial planning and regulatory powers were transferred to the large government power companies, especially the federal holding company Eletrobras. Overall planning was handled by the Electric System Coordination Group (GCSE), formed in 1982 by 11 major state concessionaires and Eletrobras subsidiaries. Tariff policies were decided by the finance minister, who still has the last word on tariff readjustments. Until recently, DNAEE automatically granted concession applications from state power companies and Eletrobras subsidiaries. The new legislation responds to two needs. One is to devise regulations for Article 175 of the 1988 constitution, which requires public bidding for all public service concessions. The other is to adapt legal and regulatory activities to the partial privatization of the power sector. While the exact nature of the new legislation will depend on the balance of power among the various interest groups, the main technical and operational principles were already outlined during planning sessions held by top power officials in the mid 1980s, as it became evident that the system was nearing collapse. Building On Earlier Studies In 1987, 300 experts met for several months under the REVISE project (Revisao do Sistema Eletrico) to conduct an in-depth study. Many of the officials now overseeing sector wide changes were REVISE participants. REVISE s final report admitted that the electricity sector was in chaos, but was still inconclusive because government companies still did not support wide ranging privatization. A committee set up by the Mining and Energy Ministry (MME) to review the energy system later submitted a report that was approved by President Fernando Collor de Mello in November This report recommended opening the power sector to private initiative, * 18 *

24 The Legal Framework for Electricity Sector Privatization setting realistic tariffs, and stimulating self production and independent production of energy. The report said that in addition to financial and economic problems, the electricity sector had institutional problems liable to jeopardize supply over the long term. Most of the changes now being proposed closely follow the MME committee s recommendations. Meanwhile, the 1988 constitution had given congress unprecedented powers and the ultimate say on fundamental legal and policy matters (in general, not only in matters pertaining to electricity). Greatly influenced by unions, it was drafted in a spirit of mild nationalism and the restoration of citizens rights after a long period of military rule. Subsequently, the country s nationalistic bent changed to a policy of open doors to foreign capital. Both President Fernando Collor de Mello, impeached in 1992, and his successor, President Fernando Henrique Cardoso, were elected under the banner of eliminating constitutional restrictions to foreign capital and reducing government intervention in the economy. Revising The Constitution Though the proposed constitutional amendments and related regulations covering the electricity sector are supported by a comfortable congressional majority, the process is a slow one. Each proposed amendment needs two separate votes in both houses. Some representatives have placed conditions on the proposals in order to preserve the assets and market interests of such major government companies as Eletrobras, Telebras and Petrobras, though still allowing for some degree of competition. Two important constitutional amendments affecting the electricity sector have already been passed. One extends equal treatment to domestic and foreign companies, and therefore fully opens the mining and electricity sectors to foreign capital. The other permits private companies to enter the gas distribution business. Another amendment expected to be passed imminently would allow private sector participation in the oil and telecommunications industries, though the exact wording and scope are still open to debate. The telecommunications legislation is relevant to the electricity sector because the fast growing cable TV market uses the electricity distribution network to set up cable systems, thus adding value to the electricity sector s distribution grid. Legislative Scorecard What follows is a rundown of electricity related legislation as of September 15, All articles mentioned are part of the 1988 constitution. 1)Under Articles 21 and 176, all potential sources of hydroelectricity and mineral resources belong to the nation and are considered distinct from land properties. Hydroelectric and mineral resources are eligible for concessions or permits, except for those up to 10 MW. (A permit, sometimes called an authorization, is an administrative action revocable at any time. A concession is a legal contract with all clauses and terms defined.) Only the government may grant concessions for exploitation of hydroelectric resources, set up national management systems, define criteria for granting concessions, pass water and energy related legislation, and appropriate property. However, landowners are assured a share in the profits from the exploitation of mineral resources; * 19 *