• November 2012
    M T W T F S S
    « Oct   Dec »
  • Pages

  • Marginalia

  • Accumulations

  • Advertisements

Electricity in the Concessionaire | The New Price of Voltage

S. Paulo — A principal order of business this week, according to last Friday’s Carta Capital — above — is the renegotiation of electricity pricing prior to concession renewal dates coming due in the next couple of years.

Having used the market power of state-owned banks to press for lower interest rates, the federal government is using its weight as a market player to push through a measure that is welcomed by heavy industry and consumer advocates alike.

Finding something meaningful to say about these events is made difficult

Source: Valor Econômic | Portal ClippingMP.
By Rodrigo Polito, Cláudia Schüffner e Claudia Facchini
Partial translation: C. Brayton

Mauricio Tolmasquim, president of the Brazilian federal government’s Energy Research Corporation — EPE — admits that the government could rethink the amount of indemnities paid to energy companies subject to federal Provisional Measure 579, which deals with the renewal of federal concessions in the sector [and the resetting of rates to decrease energy costs to industrial and residential consumers].

“We are considering this option. A new administrative order might eventually result from this process,” says Tolmasquim, who is director of energy planning at the EPE.

Cesp, Cemig, Celesc and the Empresa Metropolitana de Águas e Energia of São Paulo have all filed grievances over the value to be received.

It is here that you would like to have a sector league chart indicating the different models of corporate governance among these enterprises. Of those companies in the league chart, which are pro and which are con?

(The pug-ugly Web site of Canal Energy seems like a good source for this data. Read religiously.)

The above-mentioned, for example, are all quasi state-owned … I think.

The illustration above, from a study of the Brazilian electricity sector 1880-2002, shows the regulatory framework and league-chart organization of the sector post privatization.

Up until 2002, private-sector consumers in the retail “free markets” were clearly developing more influence over the process.

A fine article by researchers at Cameron McKenna narrates the winding plot very neatly.

Under the auction process in the regulated market [ — introduced in 2003-4), the procurement of new capacity is carried out through two public auctions every year, in which (at present) 64 distribution companies bid for energy to supply electricity to their captive consumers. The distribution companies are required to procure 100% of the electricity they distribute via the auction process

Companies such as Cemig appear to be the exception to the rule in the choice between dealing in the free and regulated markets:

Cemig today is Brazil’s largest energy marketer, responsible for 25% of the free market in energy and serving companies in  Minas Gerais, São Paulo, Rio de Janeiro, Rio Grande do Sul, and other states. Cemig also exports energy to Argentina and Uruguay. in late 2011, Cemig’s client list included 217 free market customers in various economic sectors. In all, Cemig furnished each with an average of 2,409 MW.

A fascinating side story is the formation of the Light monopoly in the years leading to the Crash of 1929 — above. A version of the company still survives and public-private partnerships are a preferred business model for many like it.

In recent years, meanwhile, a more robust regulator for the sector has emerged based on a doctrine of consumer protection. Foreign controlled electric companies, like our dear old AES Eletropaulo, are held to a certain standard of preventive maintenance and are fined or suspended for technical failings.

The same trend can be seen in the telecommunications sector. Just look at the spanking handed out recently to Telecom Italia’s TIM by Anatel, among other cases.

My ISP, for example, is lying to me about my 10 MB per second broadband connection. It actually measures 5 MB downloading and less than 1 MB uploading.

Above: cartoonist Carlos Latuff on the energy sector privatizations of the 1990s, which preceded the plague of blackouts in 2000-2002.

In sum, publicly traded energy companies with signficant participation of government agencies among its shareholders are leary of following the trail blazed by Eletrobrás: «We can afford to let market capital slide in the short term in exchange for a healthy sector, invested in Brazilian economic development and protected from speculation, in the future».

What opponents of the plan appear to object to most of all is a shift of balance between the captive and the free energy markets: “Under MP 579, all of the generators with concessions expiring in 2015 are to be allocated to the captive market.”

I suspect there are securities regulatory issues involved as well. As the FT reported in 2011, Brazilian regulatory policy on derivatives could serve as an example to other jurisdictions. In 2009, the W$J observed that rules on derivatives account developed in the aftermath of the Aracruz-Sadia cases were well-received by local and international traders.

Brazil is not interested in watching clandestine screen grabs of tweets by energy traders who boast of “stealing from little old ladies from Pasadena,” as we all remember from the Enron meltdown.

But how are Brazilian capital markets actually responding?

A word from the Association of Capital Markets Investors on the subject.

AMEC has published a communiqué encouraging shareholders in public companies to  take part in the extraordinary shareholders meetings regarding the renewal of electricity sectr companies between 2015 and 2017, as set forth in Provisional Measure 579.

The investors association calls on “all those who invest or management investments in public companies in the electrical sector” to exercise their rights in the face of important decisions that these companies have to face..

According to Amec, it is especially important for companies that have convened extraordinary meetings to examine recent regulatory changes.  “It is imperative that shareholders attend, analyzing carefully the alternatives posed by the directors, along with opinions, technical reports and divergences of opinion, and that they base their position on the interests of the company in which they are investors.

AMEC argues that the proposals will have signficant impact not just on profitability but on the very survival of the company. “There have been very few moments in our history in which knowledgeable and diligent investors can be more fundamental to preserving shareholder value and protectig the Brazilian capital markets.”

The government wants to force electrical companies to agree to MP 579 and will not act untile December 4, the deadline for the signature of new contracts. To avoid more controversy, plans to vote the MP out of committee by the end of month were discarded. A source close to the negotiations says that amendments to the MP will only be evaluated  if a signficant number of concessionaires refuse the terms of the renewal agreements.

As the Estado de S. Paulo reported on Sundy, the govern has been warned of a possible defeat in the lower house and that in order to avoid this it should let the provisional measure run its course and expire unvoted. This is only one possible solution, however — if only a small group of companies oppose the measure, opinion has it that the measure will reach its goal of cutting residential and industrial electricity bills by 20% by some other means.

If the measure is received with strong resistance, other measures can be taken after the measure expires, on February 19. The MP could be reissued, for example, or a legislative decree could call for a vote on its original content “Only after December 4 will the government evaluate its position and decide on what to do,” the source says.

Partial Translation: C. Brayton