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UNCLAS SECTION 01 OF 04 BRASILIA 002859 
 
SIPDIS 
 
SENSITIVE 
 
PLEASE PASS DOE FOR GWARD 
 
E.O. 12958: N/A 
TAGS: ENRG EINV EFIN PGOV ECON BR
SUBJECT: MINISTER ROUSSEFF EXPLAINS NEW ENERGY MODEL 
 
REF: BRASILIA 00835 
 
¶1.  (SBU)  SUMMARY.  Mines and Energy Minister Rousseff and 
Vice Minister Tolmasquim have provided EmbOffs a two-hour 
presentation of Brazil's new energy model.  The Minister 
summed up the new model as re-establishing the concept of 
public service as the sector's prevalent principle.  It 
aspires to better segregate GoB energy planning, regulation, 
and policy, while providing moderate prices to consumers, 
reasonable compensation to generators and distributors, and 
decreased risks in energy generation.  The vigor and 
resolution of this special presentation was impressive, but 
it seemed to leave many practical core issues unresolved, as 
our sampling of private-sector contacts has subsequently 
confirmed.  A common industry view, in fact, is that the 
GoB,s design to date does not yet merit the appellation of a 
full model.  That it will be ready for initial implementation 
in January 2004, as the Minister insists, seems unlikely. 
END SUMMARY. 
 
Work In Progress 
--------------------- 
¶2.  (U) The GoB,s new model was first presented to the 
National Electrical Power Policy Council on July 21. 
Honoring a promise that Minister of Mines and Energy (MME) 
Rousseff had made to Ambassador at a previous one-on-one 
lunch, the Minister and Vice Minister Tolmasquim dedicated 
two and a half hours to a special meeting with Ambassador and 
six embassy officers to explain the plan. 
 
¶3.  (U) The Minister prefaced her presentation by asserting 
that Brazil's existing energy model, launched in the early 
1990s, had proved a fourfold failure.  It had not resulted in 
moderate prices; it had not stimulated expansion; it had not 
brought investors needed assurances; and it had contributed 
to Brazil's financial crisis, she said.  The new GoB,s model 
was aimed to put &the concept of public service8 back into 
the sector's management as its prevailing principle.  At the 
same time, it is designed to respect existing contracts, 
minimize transaction costs, preclude tariff pressures 
resulting in higher consumer costs, ensure transparency, and 
create a favorable environment for long-term investment. 
Implementation is to begin Jan. 2004, with a transition 
period of two to three years, the Minister said.   Little 
concrete would change in 2004, she noted, since most of 
Brazil's energy delivery for that year is already under 
existing contracts. 
 
Main New Elements 
------------------------ 
¶4.  (U) In particular, the new model aims to:  define rules 
that limit the National Agency for Electrical Energy's 
(ANEEL) role to regulation without policy consequences or 
implications; solidify policy control in the ministry; and 
create The Energy Studies and Planning Foundation (FEPE), an 
independent GoB planning body akin to the U.S. Energy 
Information Administration (EIA), to forecast supply and 
demand.  The FEPE is to review energy production, monitor 
climate conditions, and track consumer demand to project 
future generation needs.  The long-term plan of twenty years 
is to be reviewed every four years and revised as required. 
Long and mid-term planning will be submitted to public 
hearings.  (NOTE:  The Minister reiterated her eagerness, 
expressed at her meeting with Secretary Abraham during the 
June presidential summit, for EIA technical assistance for 
FEPE.  A team will be coming to Brasilia the week of Sept. 
¶15.  END NOTE) 
 
¶5. (U)  At the core of the new model is a total re-design of 
the way electricity is sold.  Sales are to take place within 
two contractual environments overseen by the Electric Energy 
Contracts Administration Authority (ACEE), which is to 
replace the never-functional Wholesale Electricity Market 
(MAE).  ACEE will be linked to the Ministry of Mines and 
Energy (MME) and will take over the relevant organizational 
and operational structures of MAE.  ACEE will calculate 
tariffs based on a yet-to-be-determined index.  The largest 
volume of energy will be through a pool which will blend 
prices between Brazil's lower-priced hydro energy and more 
expensive thermal energy.  This is a critical change, since 
the generators will now be regulated regarding to whom and at 
what terms they sell their energy.  All distributors will buy 
energy at a set price from the mix of generators supplying 
power to the pool, with all contracts being administered by 
ACEE.  Currently, there are sixty-four distributors that will 
be mandated to contract through this pool. 
 
¶6.  (U)  The balance of energy supply will be allowed to be 
contracted through bilateral agreements between Independent 
Power Producers (IPP) and "free" consumers.  Free consumers 
are entities with energy needs above 3000 megawatts (e.g., 
shopping malls).  They may become captive with a five-year 
notice.  The new model also allows captive consumers to 
become free with the same notice.  Captive consumers may 
become free with just a two-year notice if they are going to 
be supplied by a renewable energy source.  This is the new 
model's incentive (the only one, so far) to create demand for 
renewable energy sources, yet its long-term goal is to have 
10% of consumption come from such sources.  New thermal power 
plants will only be authorized to generate as IPPs, and must 
have a Power Purchase Agreement (PPA) before construction 
begins. An energy reserve will be maintained as cushion 
against shortages. The cost will be passed on to all 
customers through tariffs. 
 
¶7.  (U) The new Energy Sector Monitoring Committee (CMSE) is 
to be coordinated by the MME and aided by FEPE, ACEE, ANEEL, 
and the administrator of contracting transmission facilities, 
the National Electrical System Operator (ONS).  This entity 
will be responsible for oversight and assure the consistency 
of supply.  CMSE will monitor projected demands, and ACEE 
will collect penalties for any deviations from a 
distributor's forecast of more than five percent either way 
at the end of the five-year contract period.  Fines will be 
imposed for both negative and positive deviations, with the 
former being more severe. 
 
¶8.  (U)  The new model expressly forbids &self-dealing8. 
For example, CEMIG (Brazil's largest generator, which has 
Southern Electric as its strategic U.S. partner), both 
generates and distributes electricity.  Under the new model, 
such companies will have to split up.  The newly formed 
generation company will have to sell its energy to the 
national pool, and the new distributor will buy it at a set 
price from a part of their old company and old competitors. 
For the same reason, the state of Parana's Governor Requiao 
has declared that he will refuse to have COPEL (Parana,s 
state electricity company) participate in the pool.  He 
asserts that the state will continue to be supplied directly 
by COPEL's low cost hydro energy and only put up surplus 
energy to the pool. 
 
Private-Sector Industry Reactions 
---------------------------------------- 
¶9.  (SBU)  Since the Minister's private brief, we have met 
with Sao Paulo State's Secretary of Energy, three association 
leaders, the president of a power producer, and the CFO of a 
power distributor to gauge reactions to the new model. 
Uncertainty was palpable in all of the meetings.  All our 
interlocutors were particularly concerned that the cost 
index, which is to be the future basis for revising the 
tariff, has not been formulated.  There was resentment at 
this model having been allegedly created in a vacuum without 
input from stakeholders in industry and associations. 
(COMMENT:  In contrast, Rousseff prides herself on the 
transparent, inclusive consultations she believes the 
Ministry has conducted.  END COMMENT) 
 
¶10.  (SBU)  Beyond these common initial reactions, we have 
heard individual concerns and observations.   Sao Paulo 
State's Energy Secretary Mauro Jardim Arce was the only one 
who expressed the need to get the model hammered out as soon 
as possible to stabilize the sector.  He commented that 
monthly consumption is down 40% compared to pre-rationing 
levels.  The current over-capacity and dollar-denominated 
debt of companies in the sector is not addressed in the plan, 
Arce also pointed out. 
 
¶11.  (SBU)  Silvia Calou, the Executive Director of ABCE (a 
67 year old association with 70 member companies involved in 
generation, transmission, and distribution), said ABCE's 
primary concern is that the model is built on flawed GDP 
forecasting with exaggerated optimistic projections which 
will result in over-investment and excess capacity.  She 
expects this scenario eventually to result in large tariff 
increases which will induce lower consumption.  The five-year 
planning cycle makes the distributors vulnerable to market 
forecast risk.  While the "transparency" portion of the new 
model allows bids to be contested, it is unclear how this 
will be done, and the association's members fear some may 
have more information than others, which will impact bidding. 
 
 
¶12.  (SBU) Most negative has been Claudio Sales, president of 
CBIEE, an association of the 15 largest private investors in 
the energy sector, including U.S., Brazilian, French, 
Spanish, Portuguese, and Belgian companies.  He was vocal 
about his distaste for the plan, forged, in Sales,s words, 
by "politically biased scholars".  It addresses the future, 
he said, but doesn't address the "present, reality, and 
survival".  But Sales also predicted that the model's 
"craziness" will be trumped, asserting that his association 
has the ear and support of Finance Minister Palocci, to whom 
CBIEE is apparently putting forth counter-proposals for 
fixing the present tariff structure and the tracking 
accounts. 
 
¶13.  (SBU)  AES Tiete President Mark Green, on the other 
hand, was surprisingly serene about the new energy model.  He 
expressed confidence that it will leave AES Tiete,s 
generation contract unaffected until its scheduled expiration 
in 2015.  He was more concerned with the bidding process, 
however, in which consumers will only be looking at price. 
He believes if bidding rules aren't more tightly defined that 
producers will cut necessary operational redundancies to 
reduce costs in order to secure bids in that competitive 
environment.  Green noted that AES has a poor relationship 
with ANEEL, and liked the fact that the new model diminishes 
ANEEL,s authority.  AES Eletropaulo CFO Jeff Safford said 
his company was still formulating its opinion of the model, 
but initially believes it is too vague to attract new 
investment.  He concurred that AES feels itself ahead of the 
game since its generating (Tiete) and distribution 
(Eletropaulo) companies are already bifurcated.  Safford 
likewise expressed confidence that AES,s Tiete-Eletropaulo 
ANEEL-approved contracts would stand up through the life of 
their 15-year term. 
 
¶14.  (SBU)  Finally, Sao Paulo Econoff received additional 
input from an August 26-27 FIESP energy seminar in Sao Paulo. 
 Players on the generation and transmission side expressed 
relative contentment with the new model, which they feel 
insulates them from most market risk.  However, other agents 
in the production chain (e.g., distributors and free 
consumers) continue to express deep concern that the model as 
it stands will not promote private investment or remove risk 
of future shortages.  In addition, private investors won't be 
interested in considering new activity until after 
legislative passage of the bill in its final form, when they 
know all of the rules and ramifications.  MME Vice Minister 
Tolmasquim attended this FIESP seminar, listened to concerns, 
and invited participants to provide input into the final 
model. 
 
¶15.  (SBU)  COMMENT: In our private briefing, Minister 
Rousseff was adamant that the bill enshrining the new model 
would be passed in time for implementation to begin by Jan. 
1, 2004.  This looks unrealistic, given stake-holders' 
abiding uncertainties and the fact that the necessary rules 
and regulations underpinning the model have not been defined, 
plus the scant prospect of legislative action in this time 
frame, considering President Lula's time-consuming priorities 
of pension and tax reform.  The long-awaited new energy model 
has already slipped well behind the ambitious original 
timeframe for its introduction.  That said, most in industry 
and the government alike would concur that it is more crucial 
to do this change well than to do it rapidly.  And on the 
positive side, it does appear that private-sector actors are 
being consulted and given the chance to make their points 
adequately at this stage of the model's refinement. END 
COMMENT. 
 
¶16.  (U)  This cable was coordinated with Consulate Sao 
Paulo. 
HRINAK