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Dark star: new regulations seek to avert a pending energy crisis in Brazil, but some private energy companies say it won't work.

Brazil's much-anticipated new energy policy will no longer be an obstacle to development in this nation of 180 million. So said government officials and energy-sector executives who took part in creating the new plan at its unveiling. The regulatory model is supposed to usher in a return to the glory days of hydroelectric energy expansion. In March, the government moved ahead, signing a US$777-million deal with 10 Brazilian and three Spanish contractors to build 2,747 kilometers of transmission lines.

The model creates a national pool where energy firms offer their best price to distributors in a basket of price offerings. As part of the deal, integrated companies like Cemig and Copel, which own and operate generation, transmission and distribution companies, will have to give up distribution. The state-run companies instead will have to create subsidiaries for each with different managers.

The model also creates government auctions for new power plants. Companies that offer the lowest price per megawatt win the bid to build. Concessions are good for 30 years, renewable for 20 years, and come with environmental and price guarantees.

"The final text is close to what the Workers Party recommended in 2002," says Luiz Pinguelli Rosa, an ex-president of Brazilian power company Eletrobras who vehemently opposed the energy plan of former president Fernando Henrique Cardoso. Then, energy generation was based on what investors deemed important, which turned out to be a disaster during the 1990s in both Argentina and California. Now, demand will be based on what distribution companies forecast, information managed by government-run Empresa de Planejamento Energetico, which will then plan supply.

Cemig, for one, is backing the newest plan. "Cemig is in favor of the new model and the energy sector in general," says Luiz Fernando Rolla, Cemig investor relations manager. Cemig execs participated in individual meetings with the Energy Ministry last year. Unlike the international power providers, Cemig sees profit in the new model because its generation costs are low. "Companies that have cheap generation costs will come out the winner. Those who have high generation costs won't fare as well," says Rolla.

Accordingly, Cemig invested $150 million in 2004, 40% of it in new generation. In 2005, it's looking to make $430 million in generation, transmission and distribution investments. Nationally, private and state-owned companies combined have sunk $13 billion into 45 hydroelectric power projects in various stages of development. Some are just waiting to turn the lights on, others lack environmental approval.

But many large, power multinationals, like U.S. energy company AES, EDF of France and Spain's Grupo Endesa, are pressuring the Brazilian energy regulator, ANEEL, to retake control of the process. That's because the new rules give the Energy Ministry lots of say, something investors fear will shift with the political moods of Brasilia. These same firms gripe that the government's goal of keeping energy cheap in order to drive economic growth is just bad business.

Large U.S. power companies are holding back for now. Duke Energy Vice President for the Southern Cone Mickey Peters says the model is yet another regulatory risk his company will not bet on. Duke has no plans to invest in expansion, Peters said, but declined to elaborate.

Brazil can afford to wait--briefly. The country enjoys an energy surplus of 7,000 megawatts, which the government expects to last until 2008. That's in large part because rationing, put in place after brownouts in 2001, is still in place. It's not unusual for hotels and luxury apartment basement garages to have electric eyes that decide when to turn the lights on, rather than 24-hour illumination. After 2008, no matter how much it conserves, Brazil is going to need 1.2% more energy for each percentage point of economic growth.

A modest growth rate for a developing country--a 3.5% increase in gross domestic product--will require Brazil to produce 4,000 additional megawatts. Considering that each megawatt means $1 million in investment, sustainable economic growth will require at least $4 billion annually just to keep supply in line with demand, according to the government's own figures.

Copel, often voted as one of the best energy firms in Latin America by the trade press, worries more about its own, low energy prices, since its cheap power will be sold quickly to national distributors. That will put an end to Parana state's low energy costs. Parana is one of the richest states in Brazil, with a highly developed agribusiness sector, transportation and ports, heavy industry and an educated labor force. The governor there, Roberto Requiao, wants to use cheap power to attract even more business.

Copel's average energy consumer, for instance, now pays $65.38 per megawatt hour. By 2008, once the surplus is gone, Copel CFO Ronald Thadeu Travedutti thinks that price will double. "This model doesn't help us," says Travedutti. At first, he says, the national cost of energy will drop. Homes and businesses in Parana, though, will see the opposite. Prices nationally then will rise within three years, and companies will get used to reacting to changing government hales. "It's likely that investors will want short-term returns on investment instead of long-term risk," Travedutti says, "driving up the price of energy even further and hurting national companies who are heavily reliant on energy."

A lot depends on the company. Usiminas Steel, a heavy consumer of energy, pays no more than 7% of its total operation budget on energy costs. If energy rose 20% in real terms, the rise would have a 2% impact on the budget, according to external estimates. Other big energy consumers, like U.S. aluminum giant Alcoa and Brazilian iron ore producer Companhia Vale do Rio Doce, see the crunch coming and are simply investing in their own private power plants in the northern part of Brazil.

Unconvinced. Copel's recently retired CEO, Paulo Pimental, says the entire policy needs to be revised. "There are many options, but the ideal policy does not exist. You can perfect what we've got, though I'm not convinced that that is going to happen in our favor," he says.

Copel is not waiting around for a break. It has two new hydroelectric plants--Santa Clara and Fundao--in the works. One comes on line in 2005 and the other in 2006, adding 170 megawatts. Executives estimate that the company needs an extra 150 megawatts annually. Ten more hydroelectric power plants are being studied.

Brazilian President Luiz Inacio Lula da Silva says the new energy policy is the beginning of a new era of development. But Copel and Cemig investments alone are not enough to meet Brazil's energy needs once the surplus is gone. Lula is confident nonetheless. "This country will produce energy, energy will produce new investments," he said in a recent speech. "New investments are going to lead to economic growth, which will generate income, generate jobs, and put this country in a place where it belongs to be--as part of the developed world."

Sounds great, but there's a lot of history to forget: Under Brazil's previous model, all but two of 22 state-owned power plants privatized during the 1990s either folded or had to be bailed out by Brazil's development bank.

[GRAPHIC OMITTED]

KENNETH RAPOZA, CURITIBA
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Title Annotation:ENERGY
Author:Rapoza, Kenneth
Publication:Latin Trade
Geographic Code:3BRAZ
Date:Jul 1, 2005
Words:1198
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