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The Electricity Bill | Shock Therapy


Addendum, December 6, 2012: a nice infographic listing the players in the electricity setor and their adherence to the federal rate-setting plan:


It is always gratifying when a genuine expert reaches much the same conclusion as your own murky thought processes. See, for example,

Regarding the confused and heated debate recently over the renegotiation of electrical concessions in Brazil, I had also guessed that the following might be true:

Many banks are issuing sell recommendations to investors and buying for their own account.

Press coverage of PL 579 — a executive order that calls for the state and energy providers to renegotiate concession contracts in the electrical sector after a number of years divided into “captive” and “free market” energy trading sectors — may well be a perfect case of «moral panic», as defined by students of rhetoric, public relations and propaganda.

In the world of fact, negotiations continue between governor and the electrical sector, with Dilma showing signs of reformulating how to calculate the sums needed to repay the electricity companies for changes they are being asked to make in the name of long-term sector strategy.

Assis Ribeiro files this analysis — by Najar Tubino — on the blog of Luis Nassif.

A massacre, an earthquake, devastation, a climate of fear and tension, an imminent explosion, a minedield, an orphaned capital market, a situation verging on mass bankrupcy. These are some of the expressions used during November to define PL 579, which deals with the renovation of concessions with electrical utilities and the lowering of energy bills for residential, commercial and industrial consumers.

The story is by Najar Tubino.

In the face of such descriptions, I decided to tone down the rhetoric, even though these were the labels being used by the daily Valor, a business-oriented joint-venture of the Organizações Globo and the Folha de São Paulo. One might correctly call Valor an arm of the two publishing giants, given that it sells hundreds of pages of ads at a minimum price of  R$130,000  – just as it publishes the quarterly reports of Brazil’s major corporations and prints the opinions and analysis of leading figures in the economy, and especially the capital markets.

The soap opera always works out the same. An “anti-market” government policy is targeted, such as the recent reduction in interest rates, which took analysts by surprise. Next comes an avalanche of articles, analysis and expert prognostication —  usually from economists employed by brokers or consultancies.

Valor is a newspaper I read regularly,, with close attention, and I have read its attempt to undermine MP 579 with the same attention.

Me, too.

But to the facts. For two years the national electricity regulator ANEEL has been discussing with industry “players” as they call themselves, certain changes in the definition of energy costs. Each year, ANEEL publishes the figures on depreciation of assets, as it is known in the industry, which are assigned to the concessionaires under the terms of contracts signed decades ago — 30 years on average. Some of these will expire in 2015 and 2017. This includes generators of all types: hydro, thermal or wind power. It also includes transmitters who maintain the lines — all 98,000 km of them — substations and regional distributors that bring light and power to many different customers: residential, industrial and commercial.

Scheduled for renewal are 58 generators, with combined capacity of 21,500 MW – 20% of the market — as well as 73,000  km of transmission lines, some 83% of the basic network of the National Integrated Sysytem and 30% of the distributors market, comprising contracts with 41 companies. The renewal deadline for those accepting the government’s  terms is December 4.

Of this total , 67% of generation is managed by Eletrobras — 62% of transmission and 25% of distribution. Electrobras is a public-private partnership, a «mixed economy» company, with shares traded in São Paulo, N. York and Madrid. It accounts for 60% of the generation market and 40% of transmission. In other words. it dominates the market., The federal government holds 58% of the shares, including a portion owned by BNDES, but JP Morgan has some 8% of the voting shares.

Panic Attack

The Norwegian fund  Skagen is also a participant, with 1% of the ON and 17.5% of the PN of Eletrobras, and says it has as R$3 bi invested in Brazil.

The PR department of this firm has produced a most hystericial demonstration of European power over us poor Tupi indians, mired as we are in the emerging world.

“We have the financial means to take this case to court. Brazil is turning into another Argentina, and the market has taken note. The government is looking to nationalize the sector.”


If I remember correctly, many of these PPPs are structured so that private investors maintain the right to name a board and vote their 49% of the shares. Chesf is one such company, I think.

State-run board members can take back the power with a plain old share repurchase, if the government wants it, too..

Since 2003, the sector has been overseen by the ONS — National System Operator — which

 is responsible for the long-term planning of the electrical sector and adminsters the EPE — Energy Research Corporation — to that end. It also organizes the  CMSE,  which monitors security of the energy supply, and MAE — the wholesale energy market —  which deals with transactions realized in the MAE and involving electricity sold through the Sistema Interligado and registered by the CEEE, the electrical energy clearinghouse.

I had a cheat sheeet here somewhere on this topic, let me look.

At he beginning of the year, the Skagen fund was worth R$1.3 billion and in November stood at R$730 million.

Also under the heading “hysteria” we might include a known Brazilian columnist who wrote:

— Eletrobras has lost 70% of its market value and runs a serious  risk of default.

The columnist ignores the fact that Eletrobras assets include 30 hyrdoelectric plants, 15 thermal, two nuclear plants, 190 substations and nearly 60,000 km of transmission lines.

It also owns half of Itaipu – a hydro operation of some 7,000 MW – as well as an equal share in others: Chesf, Eletronorte, Eletrosul, Companhia de Geração Térmica de Energia (CGTEE) and seven other distributors. The latter are considered “subprime” because they operate at a loss — they include companies in  Alagoas, Piauí, Amazonas, Acre, Rondônia and Roraima. Eletrobras is preparing to acquire 50% of the distributor in Goiás.

A portfolio of assets such as these can only disappear from market calculations because investment banking analysts calculate that share prices no longer correspond to market value.

It is here that the topic “the massacre of the electric companies” emerges, one of dozens that Valor has written on the subject. First of all, the shares of these companies are considered “defensive” — they are not expensive, and show no price volatiity, but continue to yield generous dividends at year’s end.

By law, companies listed on the Bovespa must distribute 25% of prophets to shareholders. The electrics, however, distribute more than 90% — as is the case with Eletropaulo.

So who are the experts selected to be interviewed? Representatives of U.S. or U.K. banks, known for their role in the 2008 crisis… repackaging fixed income assets and selling them to funds all over the world, at a handsome profit.

Such is the case with Goldman Sachs, JP Morgan, and Barclays. At the latter, the standard spokesperson has set the target price for Eletrobras at R$1 per share. Itaú was more generous: R$8 per share. In late April, common shares were at  R$9.69. The company had “lost” more than half its market value: from R$26 bi to R$11,6 bi.

But let us also listen to investor Luiz Barsi Filho, 73, a highly sought after commentator who lives off his dividends.

“A country cannot fail to invest in energy if it sincerely intends to encourage development;. The controversies have not been resolved, but the utilities will be the ones to suffer from the impasse. This might, however, represent a golden investment opportunity. Personally, I am long on electrical energy.”

Barsi is not alone. Many banks are issuing sell recommendations to investors and buying for their own account. But his approach is outmoded as well. I decided to check some of the analyses by these same analysts in 2010 and 2011. I found the same information in the business weeklies. One of them, Exame (Grupo Abril), listed 12 companies that paid the best dividends according to a survey by Economática — a research company headed by a former Banco Central president.

M&A, Gringo to Gringo?

Meanwhile, Relatório Reservado — a daily market rumor  newsletter — narrates the troubles reportedly encountered by two foreign players in the changing domestic landscape. I translate a selection:

There is a frenzied climate inside the Brazilian offices of  GDF Suez and Duke Energy. The government’s proposal to reduce energy prices has scribbled a question mark over what should have been one of the biggest M&A deals in the sector in years.

Some four months ago, GDF Suez was negotiating the acquisition of Duke Energy’s Geração Paranapanema. According to a source close to the U.S. group, the money on the table is around R$6 billion.  Duke controls practically  all the stock in Paranapanema — only 5.72% are publicly traded.

This newsletter discovered that the two parties intended to seal the deal sometime in 2012 — due diligence is said to have been complete last month. Now, however, with the government’s decision, the deal looks hazy. The facts have changed and so has the timing of GDF Suez …