The history lesson is especially useful, as are the league tables — which may need touching up, however. The Brazilian government has set up a useful informational page on the New Model for the Electricity Sector, passed in 2004. Three of the largest state-owned — as opposed to federally-owned — generation groups are refusing to play ball.
IstoÉ Dinheiro magazine leads with a mocking headline:
São Paulo electricity concessionaire will lose nearly 80% of its revenues by 2015. Learn how other companies who refused the federal plan to reduce electricity bills are faring.
After a period of intense political gamesmanship, scores of Excel spreadsheets and a sharp decline in their share prices — an estimated R$19.2 billion — Cesp, Cemig e Copel decided last week not to accept the federal goverment’s new rules for the electricity sector.
The three companies represent 60% of the generation capacity in play as part of Dilma Rousseff’s plan to reduce energy prices by 20% in 2013.
The most emblematic of these is Cesp, whose directors are overseen by governor Geraldo Alckmin of the opposition PSDB. In saying no to the proposal, the state-owned CESP will lose 77.8% of its revenues starting in 2015. Based on data from 2011, this implies a loss of R$ 2.3 billion in cash reserves, currently at R$ 3 billion.
[Caption] Alckmin: Govenor prefers to reduce the size of CESP rather than reduce the lighting bill of São Paulo residents.
“CESP will become a minor company,” says Ricardo Corrêa of the Ativa Corretora brokerage firm.
In Minas Gerais and Paranhá, respectively, Cemig and Copel have renewed their transmission concessions but plan to give up a number of generation plants, and so will suffer the same effects in 2015.
The three companies have three PSDB state governments as majority shareholders: the Alckmin government, in São Paulo, along with Antonio Anastasia in Minas Gerais and Beto Richa in Paraná. In turning down the concession renewals, these state-owned firms may make it impossible for Dilma Rousseff to keep her promise to reduce the average energy bill by 20,2% starting in March 2013.
Leaving out Cesp, Cemig and Copel, the guaranteed savings would be just 16.2%, according to data from the ministry of mines and energy.
We will take it, for now, and thank you very much.
The president, however, seems firm in her desire to provide cheaper electricity. “Reducing the price of energy is a decision from which the government will not back down, although it laments the lack of sensitivity on the part of those who fail to recognize the importance of this step for the sustainable growth of our economy,”Dilma told a group of business executives in Brasilia on Wednesday.
To realize its target, the government has a tax gambit up its sleeve, market analysts say.
“All it takes is a reduction of the PIS/Cofins tax on the energy bill,” says Nivalde de Castro, coordinator of the energy studies group at UFRJ.
Amid an exchange of accusations with the federal government, São Paulo says that the CESP decision was entirely technical.
Proof of this, according to state energy secretary José Aníbal, is that another of São Paulo’s state-owned firms, EMAE, accepted the federal government’s conditions and signed the contract. In the case of Cesp, the difference between the indemnity for unamortized investments offered by the feds and the sum judged correct by the state is R$ 5.4 billion.
Márcio Zimmermann, federal executive secretary for mines and energy, says: “We cannot understand the logic that led this company not to renew its concessions.” But CESP accepted lower energy prices, according to Anibal, it would have difficulty honoring existing energy contracts, worth R$130 Mw/h on average. “They suggested we buy this energy on the free market, but the price there is R$ 200 Mw/h,” Anibal said. “I challenge the federal government to show us their calculation. The situation of Cemig and Copel and very different from that of CESP. On Wednesday, Djalma de Morais, CEO of Cemig, took part in an analyst conference call and said that eventual losses, and especially those in the area of transmission, will be compensated with internal adjustments.
“Our plan provides for a 20% reduction of operating expenses in this segment, as a method of controlling costs,” Morais said. The CESP executive announced that the company will maintain its investment plan and, if necessary, will go to court to guarantee the right to renew concessions under the old rules, which apply to 3 of its 21 generation plants.
In the Senate, Aécio Neves (PSDB-MG) gave a speech in which he accused the presidency of “committing a foolish act in tryiing to reduce the price at the cost of bankrupting the sector.”
Currently, generation is responsible for 40% of Cemig revenues. Transmission accounts for another 20%. The rest is accounted for under “other businesses,” which include supplying natural gas to residences and industry.
“In the future, gas may also be used to generate electricity,” says Luiz Fernando Rolla, Cemig COO, who does not rule out the acquisition or construction of new plants.
Copel is already traveling down that path. By year’s end, the Mauá and Cavernoso 2 generating plants, with joint capacity of 380 MW, will begin operations. That is more than the 272 MW in capacity that Copel did not renew. Like Cemig, Copel adhered to the federal program only with respect to its transmission assets. In this case, the company took a hard blow. “Our revenues in this area are down 58%,” the company said in a note to investors.
Though they did not release their spreadsheets, Mines and Energy and ANEEL affirmed that the sums offered are more than sufficient to guarantee the profitability of the generation sector. “We do not understand the logic behind the refusal of these companies to renegotiate and renew,” said Márcio Zimmermann
Eletrobras, controlled by the federal government, adhered in full to the new rules, reasoning that a state-owned firm must take into account not only its balance sheet but is social role as well. Eletrobras intends to compensate for reduced income with cost-control measures.
“We will review our expenses and investments in the short, middle and long term,” said José da Costa, CEO Eletrobras. Investors did not like this news and Eletrobras shares plummeted 50%, costing it R$ 11.6 billion in market cap. Cesp, meanwhile, by not renewing its concessions, has laid to rest a persistent dream of the PSDB: to privatize the company.
“Not viable,” said Aníbal. “Who would want to buy a company with two concessions expiring in the next two and a half years?” The only other asset in the company’s portfolio is a large hydroelectric plant in Porto Primavera, whose concession expires in 2028. If it wants to rebuild its profile, CESP will have to compete in future auctions, a possibility no discarded by the S. Paulo state government.
Filed under: Antitrust, Brazil, Business, Electricity, Energy, Investment Banking, Journalism, Mining & Minerals, Nationalization, Politics, Privatization, Public Works, Public-Private Partnerships, Regulation, Southeast