US embassy cable - 04BRASILIA290

UNCLAS SECTION 01 OF 02 BRASILIA 000290 
 
SIPDIS 
 
NSC FOR DEMPSEY 
TREASURY FOR SSEGAL 
PLS PASS FED BOARD OF GOVERNORS FOR WILSON, ROBATAILLE 
USDA FOR U/S PENN, FAS/FAA/ITP/TERPSTRA 
USDOC FOR 4322/ITA/IEP/WH/OLAC-SC 
 
E.O. 12958: N/A 
TAGS: ECON, EFIN, PGOV, EINV, SOCI, BR, Energy 
SUBJECT:  "FOLHA" COMMENTARY SAVAGES GOB ENERGY MODEL 
 
 
1.  The bill to establish the GoB's would-be new energy- 
model has been passed by the Chamber of Deputies and is now 
in the Senate committee-stage (Septel.)  Over most of the 
model's key detail there continues to hang a heavy fog of 
general unclarity.  Increasingly, though, private-sector and 
independent commentators are tending to pessimistic 
judgments with regard to the GoB's designs.  A February 1, 
2004 column in top leftist daily `Folha de Sao Paulo' was 
representative of this growing school of thought. 
Following is Embassy's unofficial translation of the column. 
 
2.  (Begin Text of Unofficial Embassy Translation) 
 
HEADLINE: The Pinocchio Energy Syndrome 
 
Some statements and events that occurred in 2003 and the 
beginning of 2004 show that (Brazil's) energy-sector 
authorities have come down with the Pinocchio syndrome.  As 
everyone knows, Pinocchio has a personality disorder that 
prevents him from telling the truth.  With great innocence 
and charm, Pinocchio doesn't have the courage to stand up 
for his ideas and, consequently, loses the confidence of 
those around him. 
 
The current energy team, without the charm and less innocent 
than Pinocchio, try to fool the market and even society with 
talk that they are making changes that will assure the 
necessary investments to regain sustainable growth. 
 
In the electricity sector, at the beginning of 2003 the MME 
(Ministry of Mines and Energy) team guaranteed that the 
model proposed during the presidential campaign had been 
discarded and that, accordingly, market mechanisms and 
opinions of the agents would be considered in the 
elaboration of the new model. 
 
The first surprise came in July 2003, when the preliminary 
document was divulged.  Right away you could see that the 
"Lula light" philosophy had not contaminated the MME team. 
However, faced with criticisms from the market, society and 
even other areas of the government, the MME continued to say 
that the final version of the model would take into account 
all the suggestions presented.  This was because one of the 
principal objectives of the new model would be the 
attraction of private capital.  Much to our surprise, at the 
end of last year the MME sent two MPs (provisional measures) 
proposing a centralizing and state model to the President of 
the Republic.  In its essence, the ideas contained in the 
two MPs are similar to those that circulated (in the PT 
platform) during the presidential elections. 
 
Another event that forced the government to reconsider some 
of its positions is the recent energy crisis in the 
Northeast.  It is good to remember that during the 
presidential campaign, and even after Lula took office, some 
of the current authorities in the sector proposed breaking 
contracts both with the emergency thermal-plant operators 
as well as with the PPT.  Even some professors who currently 
hold office in the government suggested bringing suits 
against  the contracts with the Public Ministry. 
 
In light of these declarations, the start in operations of 
the emergency thermal plants was delayed to the maximum, 
obviously with costs to the consumers.  However, with the 
worsening of the crisis, the government "did an about face", 
and during the second week of January (2004), more than 30 
thermals were turned on, at a cost of R$230 to R$430 per 
MWh. 
 
In the petroleum sector there are two stories.  The first is 
the lack of transparency in the policy for gasoline, diesel 
and GLP prices.  Petrobras claimed throughout 2003 that 
their prices were the same or less than those on the 
international market.  However, when we compare the prices 
of Petrobras with those of American golf, we verify that the 
internal prices were always higher than the external ones. 
This explains, in part, the result presented by Petrobras' 
supply section.  In 2003, this section, responsible for the 
sale of derivatives, accounted for around 30% in the total 
profit of the company, while in 2002 it was only 15%. 
 
The second story is linked to the bidding on petroleum and 
natural gas blocs.  In July last year, on the eve of the 
auction in these areas, the CNPE (Nacional Council on Energy 
Policy) published Resolution No. 08.  The resolution 
contains two points that seem to have passed unnoticed by 
the market.  The first took away, in practice, ANP's 
authority  to grant concessions.    The second created two 
concepts emblematic of the current government's 
interventionism: the concept of the ideal relationship (sic) 
between reserves and production, and that of the adequate 
volume (sic) of reserves in the country.  In reality, this 
resolution strengthens the MME and leaves it to be 
understood that once self-sufficiency is attained, new 
auctions (concessions) will no longer be necessary. 
 
In the field of regulation, the government passed the year 
alternating between being for and against autonomy and 
independence of the agencies.  However, at the end of 2003, 
the government appeared to have opted for building a 
regulatory standard through which the agencies have their 
power reduced and their decisions politicized.  This became 
clear with the appointment of a politician with a position 
against the opening of the petroleum and gas sector to the 
ANP board of directors, and the dismissal of the president 
of ANATEL for having disagreed with the Minister of 
Communications. 
 
No matter how competent the government is in the art of 
hiding its true intentions, it's not possible to fool 
everyone all the time. 
 
In this sense, it is a shame that after all the time and 
work put into achieving macroeconomic stability, the 
government lets a unique opportunity for attracting private 
investment for the infrastructure sector get away. 
 
In 2004, the government needs to assume an attitude 
compatible with our real needs.  This means separating the 
Entrepreneur-state from the Regulator-state; establishing a 
regulatory and tax model that offers incentives to private 
investment; and stimulating competition.  If not, we will be 
promoting the break up of our macroeconomic equilibrium. 
 
(End Text of Embassy Translation) 
 
HRINAK