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Electricity | Waiting for the Waters of March


As the date draws near for the early renegotiation of generation, transmission and distribution concessions in the Brazilian electrical sector,  Jornal da Energia suggests that major players — including the state-owned Copel and Cesp and the privately owned Tractebel — will fare better in the stock markets than will companies that agreed to the renegotiation.

I cannot offer an authoritative translation of the article because I am still trying to catch up on my investor education regarding the ins, outs and bureaucratic tesseracts of the industry.

It does seem plausible that the state-owned companies refusing early renegotiation, the aim of which is to reduce electricity retail prices by 20%, represent political alliances acting in concert.

Copel, Cesp, and Cemig are all owned and operated governments of the opposition PSDB party. Their combined market share — my half-assed pie chart, above — represents a near-perfect counterweight to the federal Eletrobras.


Cemig is not, however, included in the list of higher performing concessionaires, and has demonstrated systematic seasonal volatility over the past 5 years — above, the company’s ADRs. Continue reading


Electricity In the Air | A Hard Charging Government Plan Takes Shape



“It’s reckless to say that there’ll be rationing, but it’s also reckless to say there won’t be,” –Ricardo Correa, Ativa Corretora

Source: Carta Capital.

President Dilma Rousseff has signed the law that extends the concessions of electricity generators and reduced taxes on the sector in order to offer electricity at a reduced cost to the consumer. Under Law 12,783, date January 11, 2013 and published in the Official Diary on January 14, 2013, generation concessions can be renewed one time only, for a period of 30 years, in order to ensure continuity, efficiency and lower prices.

In order to get their concessions renewed, the concession holders must meet the requirements of the federal energy regulator, ANEEL, with respect to rates and quality of service. ANEEL will also oversee the passing on to the end user of investments needed to maintain the quality of service and continuity of operation of the nation’s hydroelectric plants.

Naturally, capital market operators and the government have sparred over the risks and costs of the new regulatory regime.

As Luis Nassif accuses the mainstream media of exaggerating the risk of rationing due to an unusually dry tropical autumn, stock market analysts interviewed by two reporters from O Globo lament the effects of the new policy on the profitability and dividend payout of the affected companies — colorfully described as a «dividend blackout».

The Panic Newsroom

Andre Barrocal of CartaCapital writes:

What President Rousseff could not have imagined is that 2013 would begin with  electricity transformed into a major headache. This happened thanks to the combination of real factors — hydroelectric construction projects behind schedule and very little water in the reservoirs after a dry spell — together with an erroneous reading of the scenario by certain sectors of the mainstream media, who reported that a return to the energy rationing of 2001 was imminent.

Confident that talk of a return to rationing was «ridiculous», Dilma put together a political initiative while on vacation in Bahia — a vacation she decided to interrupt and return to Brasília to supervise directly. Energy regulators and other officials in the area were instructed to offer reassurances to the public and calm the concerns of citizens and the business community. The keystone of this initiative was a press conference held on January 9 with Mining & Energy minister Edison Lobão “There is no risk of an imminent shortfall and I expect there never will be,” he said.

Absolute confidence, however, depend on the summer rains, which were less than generous in late 2012, to the point that reservoirs … were at their lowest level since 2001. ONS, the National Electrical System Operator, which manages the flow of energy throughout Brazil from areas of oversupply to areas of shortfall, was obliged to modify its planning for this eventuality.

Nassif reprises an embarassing moment for Globo and the Folha de S. Paulo, both of which reported that an «emergency» meeting of the technical oversight committee of the E&M ministry had been called. The meeting was routine and went off as scheduled. Globo, Veja, and the FSP were obliged to issue a correction.

Nassif explains:

The electrical energy market is divided into two segments. There are long-term contracts, negotiated between major consumers — including energy distributors — and their suppliers. The other is the so-called spot market, used for short-term transactions.

Incorrect information such as was published by the FSP can cause volatility in the prices fixed by the spot market. It can also cause companies to suspend investments and activate contingency plans.

In this case, the market was not affected because big business and major investors have their own sources of information, and the Internet was effective in defeating the rumor and correctly reporting the MME’s response to reports on the supposedly «extraordinary» nature of the meeting.

As Bloomberg reported recently, this state of affairs is not exactly a zero-sum game.

A dry spell that’s emptying Brazilian hydropower dams is poised to turn Cia. Energetica de Sao Paulo, the second-worst generator stock last year, into one of the industry’s biggest winners.

Cesp, as the utility is known, and other producers that can sell extra electricity in the spot market may be able to profit after prices surged to a record, said JPMorgan Chase & Co. and Banco BTG Pactual SA. Net buyers of energy in the spot market — from billionaire Eike Batista’s MPX Energia SA (MPXE3) to steelmaker Usinas Siderurgicas de Minas Gerais SA — stand to lose the most, analysts said.

Nassif concludes:

Even so, the inaccurate report was used to support the argument that  problems with energy supply were the result of the plan to cut energy bills — a plan that has not even gone into effect yet.

The Corretores


Writing in O Globo today — «A Dividend Blackout», how clever —  João Sorima Neto &  Eliaria Andrade round up reactions from major brokerages to the impending implementation of price controls partially subsidized by tax breaks.

Analysts predict shortfall in energy sector dividends in the face of government actions and the risks of rationing.

Oliveira, of the Magliano brokerage house: The brokerage has sold off electricity companies in its portfolio.

After taking a beating in the stock market since September, when the government announced measures to reduce the cost of energy to the consumer, share prices continue to suffer well into the New Year.  In the first seven Bovespa sessions of 2013, shares in energy sector companies lost R$ 2.5 billion in market value. In 4Q2012, the same companies lost $34.8 billion in market capitalization.

In this case, the specter of energy rationing was behind the stampede.  Paradoxical is the situation of a sector that has always proven attractive to investors because of the dividends it pays.  In the current scenario, however, dividends will likely suffer, say experts in the field.  The energy investor, these experts say, will have to carefully select companies whose revenues are less affected by the policy.

—  Before 2011, the electric companies paid dividends of 10% to 12%, on average. That number now stands at 6% to 7%. And some companies may forgo paying dividends altogether  — according to William Alves, an analyst at XP Investimentos.

Dividends are the percentage of company profits distributed to shareholders.  They represent extra income not dependent on the market price of shares.

The electric companies have always paid healthy dividends because  they generated large amounts of cash and required few investments.

Required few investments of themselves, perhaps. Many have taken a beating from a newly activist crew of regulators in recent years over quality of service.

Even now, as I type this paragraph, we are under fire from torrential rains likely to have a dual effect: It will help swell reservoirs and it might well produce those marvelous serial explosion of electrical transformers to which we have become accustomed over the years.

Energy-sector companies were also considered a low-risk, defensive investment, with stable share prices even during moments of market volatility. This has changed, as we have seen in recent months.  [The sector’s] stock exchange losses are approaching 50%.

The tumble occurred [in September.] when government action threatened the profitability of these companies, explains Júlio Oliveira, a partner at the Magliano Corretora brokerage house.

In order to reduce electrical bills by 20% starting in February, the federal government rescheduled the renovation of concessions expiring in 2017 or earlier, and ordered generators and transmitters to accept 70% of their current income.  With that, companies that adhere to the new plan will see profits decline.  Energy rationing could also reduce sales and impact profits, although the government denies there is any risk of rationing.

—  Bringing thermoelectric plants online [as a back-up measure]  also concerns the shareholders of the distribution companies.  The cost of production of these plants is much higher, and the sector will have higher costs until rates are readjusted, according to Pedro Galdi, a market strategist at SLW.

The entire sector has suffered in the stock market, but even so, market analysts are not recommending a massive sell-off.  They are closely studying the impact of the regulatory changes on each and every company in the sector and have reached certain conclusions. There is consensus that Eletrobras shares are not a good buy option at the moment.  Some expect that the state-owned company will pay no dividends at all.  The recommendation is for investors in Eletrobras to trade their shares in for other stocks.

— Eletrobras was the first company to adhere to the government reform.  This new reality reduces cash generation, which affects the payment of dividends, says William Alves of XP.

Julio Oliveira, of the Magliano brokerage, believe that if Eletrobras does pay dividends, these will be the minimum demanded by law: 25% of net profits.

CTEEP — the São Paulo energy transmission company —  has already paid out 100% of profits in the form of dividends, but it is highly unlikely to do so again, says Beatriz Nantes, an energy specialist at Empiricus Reserach/Investmania.

According to Nantes, CTEEP’s acceptance of the government plan will affect its earnings. Nantes also does not believe that Eletropaulo will offer satisfying dividends.  CTEEP, though not so heavily affected by the government plan, recently concluded its third cycle of rate readjustments, in which the company’s prices are reevaluated.  The price was cut by 9%, on average.

—  Eletropaulo is no longer a reliable payer of dividends, — Nantes says.

Among those energy-sector stock that may still pay attractive dividends are Tractebel, TAESA and AES Tietê, the analyst says. Nantes believes that these companies were not heavily affected by the government-mandated changes.

The XP brokerage house is recommending Taesa and Tractebel.

Tractebel carries very little debt, which enables it to generate more cash.  The concessions held by Taesa, meanwhile, expire in 2030, which reduces the company’s regulatory risk exposure, says Alves.

Magliano Corretora has removed all energy-sector stocks from its portfolio of recommended investments.

— You should not sit on these stocks for four or five years, especially in view of these changes in the industry.  We have a portfolio of dividend-paying shares that, while not as generous as electricity dividends once were, still present a favorable opportunity cost.

Among these are Ambev, Souza Cruz, Sabesp and Vale. Souza Cruz, for example, will pay 100% of its profits as dividends. This is one option to consider while the profitability of the electric sector remains unclear,  Oliveira says.

Beer, cigarettes, sanitation and nickels. Who can live without them?

Start-Up Brasil | Acorns to Oaks


«… solving the problems of an industry or a corporation is not a sexy way to make a living»

Source: Folha de S. Paulo | Brasilianas.Org
By: Reinaldo Chaves
Translation: C. Brayton

The Start-Up Brasil program, launched by the Ministry of Science, Technology and Innovation in November of last year, is an attempt to replicate international success stories in support for start-ups — fledgling companies in the IT sector — based on a joint effort by government and the private sector.

Chile founded a similar program two years ago and has already attended 397 companies and 888 entrepreneurs. The annual budget of Start-Up Chile is US$ 14 million. Israel has invested heavily in start-ups since the 1990s, mostly in the areas of military, energy and aerospace technologies. The University of Jerusalem receives annual funding of more than US$ 1 billion.

The Brazilian program calls for investing R$ 40 million in three years in at least 150 companies. At the outset, six accelerators will be selected to service the selected start-ups.

The accelerators will create incubators and provide research and consulting — see the «Mission Statement», below. Continue reading

Brasília | Oligopolies Under Observation in 2013

m mineiro

Oligopolies in the Media Market

Source: Folha de S. Paulo | Brasilianas.Org.
By: Vladimir Safatle
Translation: C. Brayton

In recent weeks, Argentina made fresh headlines in Brazil with stories on clashes over the enforcement of Argentina’s so-called “Media Law,” which defines a new regulatory order for companies in the news and entertainment sectors.

Some of these new provisions, and especially those related to combating monopolies, have been viewed as signs of a vengeful State intent on limiting freedom of expression, as in the case of the archrivalry between President Kirchner and the Clarín group.

Leaving aside these heated public conflicts, however, the Argentines are engaged in an important debate that deserves to be treated more dispassionately. It seeks an answer to the question: “Do we or do we not need laws that restrict the concentration of ownership in the media sector?” That is to say, can we successfully argue that concentrated media ownership does not necessarily affect democratic practices?

At this juncture, it is worthwhile remembering that the global media market is currently among the most oligopolized in the world.

What is more, as we gather from  reading between the lines of the recent case involving Rupert Murdoch, this state of affairs really does affect our political life.

Murdoch built an empire of TV stations, newspapers, magazines, radio stations, book publishers, movie theater chains, and Internet portals that gave him the ability to mold debate, pressure governments and interfere in politics to the extent that it promised the American general  David Petraeus its unlimited support should he choose to run for U.S. president.

Situations like this are not exclusive to the Anglo-Saxon world, however. Recent decades have witnessed a brutal, highly negative trend toward consolidation of the sector that affects not only our politics but also our culture.

A single group like Time Warner, for example, exercises simultaneous control over production, distribution and development of new techniques. In this case, we are justified in saying that laws barring the formation of oligopolies is a way for society to defend itself against the coerced uniformity of opinion and the silencing of alternative voices.

Opponents of this viewpoint might reply that a more fragmented market would leave media companies more vulnerable to government pressure. This argument is not without merit.

The solution to this aspect of the problem, however, is not the perpetuation of the other aspect. Strategies are needed in order to prevent governments from framing the news according to their own interests.

In Brazil, this would imply limiting government influence by drastically cutting spending on government advertising — which should be confined to public service announcements — and enforcing laws such as the ban on politicians owning media outlets. Clear and absolutely fair criteria for the use of publicity budgets by state-owned firms should be developed.

São Paulo’s state-owned and publicly traded Sabesp might make an interesting case in point. It frequently walks the corda bamba between public service announcements and government propaganda, as is “this is your current government at work for you.”

But this could be an artifact of my own subjective impression as a couch potato. This might make a good little feature article to research.


Where are all the Sabesp TV spots stored? What PR techniques do they apply? Do they amount to the use of public money to promote a specific administration?

Anyway, I have always thought that the «monthly payola» cases should be combined and subjected to a parliamentary commission of inquiry — CPI — of the PR industry at the heart of these and other scandals.

After all, the exact same mechanism was used in several of these cases: Publicity services were contracted by a state or municipal government for a given cultural or sporting event — Rock in Rio, an Enduro motorcycle event in Minas Gerais — and then publicity fees were accounted for as having been paid to fictional or purpose-built Potemkin village PR outsourcers.

In fact, however, most of these PR funds were skimmed off for use by political and private parties. Enter the hidden camera video of political operators stuffing their socks and jocks with bundles of cash and you have yourself a classic Brazilian “mountain of money” scandal.

In any event, big PR has a demonstrated capacity for financial legerdemain — think of Duda Mendonça as well as Marcos Valério. Perhaps the second most common source of laundered campaign money: state-owned companies like Furnas in Minas Gerais.

The Vanguard of the Obsolete

Gilberto Maringoni e Verena Glass of the IPEA provide a detailed historical narrative of media law development in Latin America, explaining why regulation produced in the 1930s-1960s no longer applies.

Another factor that could not have been anticipated was the invention of digital technology and the deterritorialization of media companies through the use of virtual networks.

Before the digital revolution (1980- 90) news organizations had to be located in the country where they operated. This was not merely an arbitrary legal requirement, based on nationalist developmentalism. At this time, the entire network of businesses, and especially in the advertising sector and media finance, was anchored in calmer waters.

Now, however, an ISP, Web portal or cable TV provider can transmit content from any part of the world, without having to use antennae or sophisticated broadcast equipment.

The main problem is that the ISPs and cable operators are not classifiable as content and information producers as defined by the current, outmoded legislation.

The privatization of Latin American telecoms in the 1980s-90s, opened up a veritable  Pandora’s box. State-owned telephone monopolies were auctioned off. It may be that the authorities who sponsored this policy were blind to the about-face that would make possible a state of borderless media convergence.

Telephone operators, for example, which during the 1990s were limited to long distance voice communication, underwent a consolidation that two decades later would turn them into the biggest Internet providers in Brazil and arm them with the same political firepower as any traditional TV network.

As things stand, TV, radio, telephone, film, literature, music, data transmission, navigation data and many other services can be tapped using nothing more than a single smartphone.  Each of these functions, however, must still comply with rules specific to its sector.

ISPs use technology to produce and distribute content. To the extent that they are not subject to the old legal norms, their content can be produced anywhere in the world and transmitted to any other, with adjustments made for local characteristics [such as  language].

At the same time, now that global media maintains offices in many different countries, a complex series of loopholes in current local laws has been used to legitimate the local operation.

From the same symposium,, Denis de Moraes:

Brazil is in the  vanguard of obsolescence [sic] in terms of its regulation of the media. Its radio and TV regulator remains one of the most outmoded in Latin America. To date, the congress has made no progress toward regulating Articles 220 and 221 of the 1988 Constitution, which respectively ban monopolies in the mass media and gives preferential treatment to TV and radio stations “serving education, artistic, cultural and informative ends,” as well as “the promotion of national and regional culture and a plan of stimuli to independent productions who qualify. .The lack of action by successive governments in this area is just plain alarming.

Media a Priority for 2013

The president of the ruling PT has said that political reform and media regulation are the top priorities of this year’s Congress. The quote is from November of last year.

Rui Falcão said his party has at least two goals for 2013: A new regulatory framework for the media and political reform.

The party will begin to execute its strategy — calling on the federal president to issue a bill that regulates the media —  the party will include the issue in its agenda for the meeting of the national leadership.

Last week, Falcão told the international press that he hopes the presidency will send down a bill regulating communications in Brazil. “It is not our party that wants to pass enabling legislation for these provisions of the Constitution, it is the congress as a whole. We hope that our government will send down a bill establishing a regulatory framework that will increase freedom of expression and eliminate any possibility of censorship of the established media, regulating provisions in the Constitution that have yet to get off the drawing board.”

Risk Shopping | Brazilian Cases in Point


Source: Folha de S.Paulo.

Risk evaluation agencies assigned high ratings and low risk to several Brazilian banks that recently failed.

Banco BVA, for example, received a BBB rating from ratings agency LF Rating four days before suffering a Central Bank intervention on October 19.

Austin Rating assigned  BVA a BBB+ less than two months before its collapse.

The same occurred with  Cruzeiro do Sul, liquidated in September with R$ 3.1 billion in debt, and  Panamericano, which underwent a federal intervention on November 9, 2010.


Esteemed customer: you will be able to access funds in your StarCash account until December 13, 2012. Starting December 28, 2012, control will pass to Banco Bonsuceso, which will deal with new cards, card replacements, and so on

Risk ratings affect companies in one of two ways. On one hand, investors use the ratings as a guide to potential investment. Some funds invest exclusively in paper declared risk-free .

On the other hand, financiers evaluate risk using these ratings: the lower the rating, the more expensive it is to borrow money.

With the blessing of the ratings agencies, pension funds such as Petros, Brazil’s second largest, is able to invest in riskier fixed income paper, stamped “safe” by the agencies.  Petros had R$ 80 million in three funds with ties to BVA and invested in the bank’s bonds.

Shopping for Ratings

A practice still allowed by the market aggravated the problem: the so-called “shopping mall of ratings.”Companies needing positive ratings request a preliminary report from a given agency. If the rating is low, they try again with another agency, and so on until receiving the rating desired.

Since it is not yet required to make public these preliminary findings, the investor never suspects that the company has a bad credit rating.

To counter the negative effeects of this practice, the Brazilian SEC — the CVM — will as of January 2013 require the publication of preliminary ratings reports on the Web site of the rating agency

“This new CVM rule should mitigate the «ratings shopping center»  deve mitigar esse shopping de ratings,” says Rafael Guedes, CEO of Fitch Ratings Brasil.

“In Brazil, every agency has its own criteria, and there are major discrepancies,”say Sergio Garibian, ratings director, Standard & Poor’s, Latin America.

In February 2006, Cruzeiro do Sul exited its contract with Fitch, which had assigned it a rating of BB+(bra),  with “elevlalted risk of default.” The same year, the bank signed with Moody’s, which assigned it Baa1 for long-term deposits, and then three months later raised it toA3. Both are considered indicative of investment grade.

Responding to these contradictions, federal deputy Eduardo da Fonte (PP-PE) presented a bill that would make agencies responsible for “damages caused by intentional or negligent conduct in arriving at risk ratings.

“It is not norml for some agencies to classify a bank as low-risk and then watch it go out of business a few days later,” Fonte says. “Either the bank coopted the agency or else the agency is not qualified to rate anyone.”

Erivelto Rodrigues, CEO Austin Rating, says the “shopping mall of ratings” only occur in structures such as FIDCs — investment funds in rights to future receivables.”I don’t believe this happens with companies and banks,” he said.

Para Paulo Rabelo de Castro, CEO of SR Rating, which classified none of the banks in question, “strict regulation is required at a moment when the government is trying to stimulate the market for debentures.”

Brazil’s largest pension fund, Previ only accepts ratings from three agenices: S&P, Moody’sand  Fitch. Funcef, meanwhile, buys private debt instruments that are evaluated by at least one ratings agency, it matters not which.

Funcef was holding notes from both  PanAmericano and Cruzeiro do Sul. In the  Cruzeiro case, it received its entire investment back thanks to a special guarantee clause.

The Risk Mall 101

I can hardly claim to be an expert on the subject, but a study byVasiliki Skreta and Laura Veldkamp — «Ratings Shopping and Asset Complexity: A Theory of Ratings Inflation» seems like a good place to start. The abstract:

Many identify inflated credit ratings as one contributor to the recent financial market turmoil. We develop an equilibrium model of the market for ratings and use it to examine possible origins of and cures for ratings inflation. In the model, asset issuers can shop for ratings — observe multiple ratings and disclose only the most favorable — before auctioning their assets.

When assets are simple, agencies’ ratings are similar and the incentive to ratings shop is low. When assets are sufficiently complex, ratings differ enough that an incentive to shop emerges.

Thus, an increase in the complexity of recently-issued securities could create a systematic bias in disclosed ratings, despite the fact that each ratings agency produces an unbiased estimate of the asset’s true quality.

Increasing competition among agencies would only worsen this problem. Switching to an investor-initiated ratings system alleviates the bias, but could collapse the market for information.

The lede:

Most market observers attribute the recent credit crunch to a confluence of factors: excess leverage, underestimation of risk, opacity, lax screening by mortgage originators, improperly estimated correlation between bundled assets, market-distorting regulations, a rise in the popularity of new asset classes whose risks were diffcult to evaluate, as well as credit rating agency conflicts of interest.

This paper investigates the misrating of structured credit products, widely cited as one contributor to the crisis. Our main objective is to critically examine two arguments about why ratings problems arose and to show how combining the two could produce a ratings bias that imperfectly informed investors would not anticipate.

One argument focuses on asset issuers who shop for the highest ratings. The New York Times explains: The banks pay only if [the ratings agency] delivers the desired rating . . . If Moody’s and a client bank don’t see eye-to-eye, the bank can either tweak the numbers or try its luck with a competitor like S&P, a process known as ratings shopping.

A final thought: the Sadia and Aracruz derivatives crises of 2007 — exchange rate swaps — seem to illustrate the same logic. Risky assets kept off the books until the roller coaster came to a full stop..

In reality, the two largest agencies, Moody’s and S&P, account for 80 percent of market share. When a structured credit product is issued, the issuer typically proposes a structure to an agency and asks it for a \shadow rating.” This rating is private information between the agency and the issuer, unless the issuer pays the agency to make the rating offcial and publicize it. In the model, an asset issuer can purchase and make public one or two signals about the payoff of an asset. We call these signals “ratings.” After choosing the number of ratings to observe and which ones to make public, the issuer holds an auction for his assets. After each investor submits a menu of price-quantity pairs, the asset issuer sets the highest market-clearing price for his asset, and all investors pay that price per share.

Brazilian Electricity Wars | The R$ 5 Billion Feud


Surprisingly informative:


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:

Honey, I Shrank CESP

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.

7D | A Mexican Standoff?

On 7D, nothing will happen

On 7D, nothing will happen

Argentine media group Clarín announces a stay of execution.

It says it will not be required to comply with the 2009 Ley dos Medios until all appeals have been exhausted.

As soon as [the court] extended the stay in the case challenging the constitutionality of certain provisions of the media law, Clarín issued the following statement:

The Grupo Clarín has just been informed that the injunction has been extended until a definitive ruling on the constitutionality of provisions of the Media Law  has been arrived at.

As it has throughout the process,  Grupo Clarín will follow the law, respecting the Constitution, the law, and the findings of the courts.

Eric Nepomuceno of Brazil’s Observatório da Imprensa summarizes the case, below.

As it happens, and contrary to the image of a deeply polarized debate, there is internal disagreement among shareholders in the Clarín group over compliance — I will translate that, too. But first, Continue reading