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Session 22 Comparison Case Study: Two Neighbors in Contrast: The Restructuring of the Power Sectors of Argentina and Brazil
PURC/ARSESP Training Sao Paulo, S.P., Brazil October 22-26, 2012
Ashley Brown
Executive Director, Harvard Electricity Policy Group
John F. Kennedy School of Government Harvard University
Of Counsel, Greenberg Traurig, LLP
Starting Points Brazil
65, 134 MW Installed Capacity (1998)
95+ % Hydro Need for Thermal
Expansion National ownership of
generation and transmission
State owns distribution companies
Nationalization completed in 1970’s
5 % Demand Growth (1999)
Argentina 23, 740 MW Installed
Capacity (1998) 70% Hydro, 30% Thermal Need for Thermal
Expansion National Ownership of
Generation and Transmission
Provinces own distribution companies
Nationalization completed in 1940’s and 50’s
5 % Demand Growth
2
Starting Points Continued
Brazil Three Systems:
South/South Central; Northeast; Isolated Systems
Heaviest Load in South/South Central region
Hydro Facilities located on only a few rivers
Argentina Nationally
interconnected system
Buenos Aires is bulk of load
3
Starting Points Continued
Brazil Many Hydro plants
are multiple use: Electricity, Water/Irrigation, Navigation
Generating resources far from load centers
Procel Efficiency Program
Argentina Generating resources
far from load centers
4
Conditions Prior to Restructuring Brazil
Generating and Transmission Sectors well planned and operated
Deteriorated distribution networks
High non technical losses Some vertical integration
at state levels 45% Rural Electrification 1 Nuclear Unit- 2 others
planned 1 Huge Binational Plant
Argentina Thermal plants
deteriorated Deteriorated distribution
systems High non technical
losses Little vertical integration
at province level 70 % Rural
Electrification 1 Nuclear Unit 2 Binational Plants
5
Sector Perspectives on Restructuring
SECTOR BRAZIL ARGENTINA
Labor Opposed Opposed
Multi-Laterals Favored Favored
Financial Sector Favored Favored
Industrials Mixed Favored
Consumer Groups
Cynical Sympathetic
6
Socio/Economic Context
Brazil Massive Government
Debt Real Plan Inflation declining Pressing social needs Skewed demographic
and geographic distribution of wealth
Partly first world/partly third world
Argentina Massive Government
Debt Peso pegged to dollar Inflation attacked Pressing social needs Skewed demographic
and geographic distribution of wealth
Partly first world/ partly third world
7
Political Context of Restructuring
Brazil Democratic center
right government Weak left State debt to National
Government National Government
Supreme in Electricity Tradition of
Protectionism/Economic Nationalism
Extensive state involvement in economy
Argentina Democratic Peronist
Government Weak left Financially weak
provinces National Government
Dominant in Electricity Tradition of
Protectionism/Economic Nationalism
Extensive state involvement in economy
8
Institutional Responsibility for Restructuring/Privatization
Brazil National Development
Bank (Parastatal) Ministry of Mines and
Energy coordinates sector only
Argentina Ministry of Finance
oversight Secretariat of Energy
coordinates entire effort
9
Priorities of Process
Brazil Maximize Revenues
from Asset Sales Restructuring of
market heavily influenced by promotion of asset sales
Creation of regulatory authority institutions tertiary
Argentina Restructure electricity
market/market design/asset sale
Market design heavily influenced asset sales
Creation of Regulatory Institutions concurrent with Restructuring
10
Privatization Process Brazil: Assets to Be Privatized
a. Nuclear Unit (s) b. Itaipu Binational Project c. Transmission Grid d. Isolated Generating Units
11
Privatization Process Brazil
a. Began with Distribution Companies b. Set Minimum Price and Licenses Terms and
Conditions c. Documentation for Due Diligence d. Bidders Identified e. Bids Submitted/Awarded
12
Privatization Process Brazil Continued
a. National Development Bank Took Control of State Owned Distribution Companies Indebted to It
b. States With Financially Viable Distribution Companies Made Their Own Decisions on Privatization
13
Privatization Process Brazil Continued
a. Generation Assets b. States Made Own Decisions Regarding Generators
they owned c. Four Generating Companies owned by National
Government 1. Gerasul- 1 Generating Company, 1 Transmission Co.
• Privatized only after Distribution Companies Instructed to Sign Contracts
2. Furnas- 2 Generating Companies, 1 Transmission Co. • Mired in Political Controversy
3. Chesf- 3 Generating Co., 1 Transmission Co. • Problems with Multiple Use Hydro Facilities
4. Eletronorte- 1 Generating Co., 1 Transmission Co. • Mired in Controversy
14
Privatization Process Brazil Continued
New Entrants a. State Owned Companies Solicited Bids Before
Privatization b. National Government Retained Determinative
Planning Authority to Identify Needed Projects (Generation and Transmission
c. Identified Projects Put out for Bid
15
Privatization Process Brazil Continued
Initial Licenses a. Issued Prior to Regulatory Institutions’
Creation b. Considerable Investor Input to Terms (e.g.
Rio Light) c. No Reference to Subsequent Regulation
16
Privatization Process Brazil Continued
Case Examples Coelba
1. Rural Electrification Choices i. Statewide Monopoly Without Rural
Electrification Obligation ii. Service Territory Monopoly with Competition for
Rural Electrification
17
Privatization Process Brazil Continued
Case Examples Rio Light
1. Cost Cutting vs. Productivity Gains 2. Quality of Service Issues
18
Argentina Privatization
a. Began with Generation and Transmission b. Divided Assets into 38 Generation Companies
and Transmission Company c. Set Target Prices d. Documentation for Due Diligence e. Bidders Defined f. New Entrants in Generation Encouraged
21
Argentina Privatization Continued
a. Privatization of Distribution Companies Left to Owners
b. Mostly Provincial Governments
22
Argentina Privatization (continued)
a. Intial Licenses 1. Issued Concurrent with Creation of Regulatory Agency 2. Licenses Subject to Regulatory Agency Jurisdiction
23
Argentina Privatization Process
Generation a. Split into 38 (now 44) companies b. Prohibition of Vertical Integration c. 88% = highest market share d. All generators must be in Pool e. Ease of Entry f. Market Governs/ No Planning
24
Argentina Privatization Process (continued)
Transmission a. One High Voltage (500 kv) Licensee to
Transport Between Regions b. Five Regional Licensees (132-220 kv) to
connect generators and distribution systems. c. 2 large users within region
25
Argentina Privatization Process Continued
a. SEGBA (44% of Load) 1. Divided into 3 Companies for Privatization
b. 60% of Distribution Land Privatized
26
Argentina Privatization Continued
Distribution a. 95 Year Concessions (Large Buenos Aires Area
Companies) b. Concessions subject to 10 year management
periods c. Large Customers Have Direct Access to Grid d. Provinces Decide Own Terms
27
Regulatory Issues
Brazil DNAE converted to
ANEEL ANEEL may delegate
some authority to states
Many licenses preexist ANEEL
Argentina ENRE created Provinces Regulate
Distribution Licenses subject to
regulatory oversight
28
Market Institutions
Brazil ONS = System
Operator MAE = Power
Exchange Electrobras = Finance
and Indicative Planning
Argentina COMMESA = Power
Pool/System Private Hedge
Markets Secretariat of Energy
=Market Monitoring.
29
Pricing Business Brazil Argentina
Distribution RPI RPI- pegged to US rates (X Factor in Some places)
Energy Purchases for Resale
Prudent in Zone of Reasonableness
Market Price Pass Through
Transmission Still Being Debated Zone Based, Still Debated
Generation Contracts Still in Force
Energy/Hedge Markets
Energy Sales Retail Access
Eventual Access for Large Customers
Open Access for Large Customers
30
Post Privatization Service Problems
Brazil Blackout in Rio de
Janeiro (Rio Light and CERJ)
Cost Cutting in Large Part of Cause
Fines Assessed by ANEEL
Regulatory Jurisdiction Challenged
Argentina Blackout in Buenos
Aires (Edesur) Negligent
Performance in Investment for Improvement
Fines Assessed by ENRE
No Challenge to Regulatory Jurisdiction 31
Post Privatization Service Issues
Brazil Jurisdiction
• Concessions • Re. State/ Federal
Systemization of Regulatory Judgement (e.g. Prudence, Service Quality
Market Power Cross Subsidies
Argentina Transmission Pricing Systemization of
Regulatory Judgement (e.g. Service Quality)
32
Post Privatization Prices Argentina
Before After
Generation ~41 (1992)
*Spot Price
~29 (1995)
*Spot Price
Distribution 31.2 (1992)
20.9 (1995)
33
Post Privatization Prices Brazil
Before After
Distribution Original Cost Contracts with Distribution companies are pegged to purchase price
Generation Original Cost Price Pegged to Purchase price
Argentina and Brazil Pre-Privatization prices are distorted
because of cross-subsidies 34