US embassy cable - 03BRASILIA3773

UNCLAS SECTION 01 OF 02 BRASILIA 003773 
 
SIPDIS 
 
SENSITIVE 
 
NSC FOR SHANNON 
STATE FOR WHA/BSC 
STATE PASS OPIC FOR BMCGUIRE/GPOHREN 
DOE FOR GWARD 
COMMERCE FOR 4332/WBASTIAN/JANDERSON/TSHIELDS 
3134/010/DEVITO/ANDERSON/CREATORE 
 
E.O. 12958: N/A 
TAGS: ENRG, EINV, EFIN, PGOV, ECON, BR 
SUBJECT: MORE DOUBTS ABOUT ENERGY INVESTMENT IN BRAZIL 
 
REF: A. BRASILIA 3405 
     B. BRASILIA 2859 
 
Sensitive but unclassified, please protect accordingly. 
 
1.  (SBU)  SUMMARY:  A visiting OPIC/private sector 
delegation found scant reassurance about Brazil's New Energy 
Model or investing in Brazil's energy sector during November 
19 meetings with Brazil's energy regulatory agency (ANEEL) 
and the Ministry of Mines and Energy (MME).  ANEEL's 
Superintendent called into doubt whether the GOB's energy 
model offered investors any safety.  An MME rep defended the 
policy to the OPIC delegation, but refused to be drawn out on 
specifics.  The ANEEL criticisms and MME's failure to deal in 
specifics left the impression of a policy adrift.  End 
Summary. 
 
2.  (SBU)  Superintendent Cristiano Amaral of the National 
Electrical Energy Agency (ANEEL) opined that Brazil's New 
Energy Model (Ref. A) does not give private investors any 
type of security.  Amaral said the public consultation phase, 
which will end within the next two weeks, will not net great 
changes to boost investors' confidence.  He pointed out that 
80% of generation plants are publicly owned, and the primary 
Brazilian state-owned company Eletrobras will keep the 
"lion's share" of the capacity.  Amaral added, "At the 
present time, it is very difficult to say if it is safe to 
invest.  Even construction under some existing concessions of 
hydro-plants have stopped."  The market uncertainty is 
discouraging energy sector investment.  Despite this fact, he 
said there will be 3000 megawatts of new generating capacity 
completed this year, equaling 10% of installed capacity.  In 
a telling sign, these are primarily small power plants built 
by private companies to meet their own needs. 
 
3.  (SBU)  Brazil's New Energy Model is expected to be 
presented to Congress within the next two weeks, but would 
not take effect until 2005.  Ministry of Mines and Energy 
Executive Secretary Mauricio Tolmasquim told the press 
recently that there would not be enough energy liberated from 
existing contracts to be  directed into the energy pool 
created under the New Energy Model until then.  Amaral has 
reservations about the model, and believes it will 
metamorphose one from allowing Independent Power Producers 
(IPPs) to find markets along side the blended energy pool 
into a single pool/single buyer system.  He expects the lower 
pool prices, driven by the already-amortorized power plants, 
will force IPPs and free consumers to participate in the 
pool.  Amaral hopes that political pressures will transform 
the New Energy Model into a more reasonable law that 
encourages foreign investment and protects IPPs. 
 
4.  (U)  Amaral said that the renewable energy program is a 
bright spot in the sector, since small renewable plants can 
operate outside of the energy pool under the New Energy 
Model.  Renewable energy operations are assessed half of the 
transmission tariffs, and Eletrobras guarantees a minimum 
price.  These incentives are granted for any renewable energy 
plant generating under 30 megawatts.  Currently, 100 wind 
projects have permits under this program. 
 
5.  (U)  Ministry of Mines and Energy Program Director Maria 
Passos, in contrast, claimed energy sector investment is 
still flowing from Spain, Portugal, and France.  Passos said 
that the Lula administration's sound macroeconomic policies 
and New Energy Model offer security to foreign investors. 
The model establishes rules, offers consistency in planning, 
and stability in regulation, she said.  When asked to expound 
upon the details of the model, Passos demurred, replying that 
only MME Minister Rousseff and Executive Secretary Tolmasquim 
could talk about specifics.  Moreover, the GOB would not 
provide exchange rate or inflation guarantees under the new 
model, as these are too risky. 
 
6.  (SBU)  COMMENT:  The tone of Amaral's criticism of the 
energy model may have been occasioned in part by tensions 
over the GOB's efforts to reform the independent regulatory 
agencies (Ref. B).  The substance of his criticism, however, 
is right on the mark.  Moreover, given a chance to defend its 
policy, our GOB interlocutors failed to provide the sort of 
specifics that would reassure potential investors.  Based on 
what we have seen to date, the new energy model appears 
unlikely to attract significant new investment to the crucial 
power sector. 
 
HRINAK