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

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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

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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

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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

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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

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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

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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

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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

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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

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Privatization Process Brazil: Assets to Be Privatized

a. Nuclear Unit (s) b. Itaipu Binational Project c. Transmission Grid d. Isolated Generating Units

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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

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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

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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

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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

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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

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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

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Privatization Process Brazil Continued

Case Examples Rio Light

1. Cost Cutting vs. Productivity Gains 2. Quality of Service Issues

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Brazilian Power Sector Privatization

Argentina and its Provinces

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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

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Argentina Privatization Continued

a. Privatization of Distribution Companies Left to Owners

b. Mostly Provincial Governments

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Argentina Privatization (continued)

a. Intial Licenses 1. Issued Concurrent with Creation of Regulatory Agency 2. Licenses Subject to Regulatory Agency Jurisdiction

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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

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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

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Argentina Privatization Process Continued

a. SEGBA (44% of Load) 1. Divided into 3 Companies for Privatization

b. 60% of Distribution Land Privatized

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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

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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

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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.

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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

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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)

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Post Privatization Prices Argentina

Before After

Generation ~41 (1992)

*Spot Price

~29 (1995)

*Spot Price

Distribution 31.2 (1992)

20.9 (1995)

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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

Tariffs (1995)

Residential Industrial

Argentina 11.85 18.30

Brazil 9.59 5.48

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