Brazil: “Electric Company Auction Is Generating Steam Heat”

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“Cat-yanker in a judge’s robes”: Editorial cartoon, July 27, 2007, Folha de Acre. “Judges Adair José Longuini and Regina Longuini, to the astonishment of Acrean society, are being accused by the Electrical Company of Acre (Eletroacre) of stealing electrical energy at their mansion in the Tropical neighborhood. … Adair won fame for the case of Chico Mendes, who was killed on December 22, 1988, in Xapuri (Acre), sentencing rancher Darli Alves da Silva and his son, Darci Alves Pereira, to 19 years in prison as the parties who ordered and carried out the assassination of the journalist.”

Leilão da Cesp exibe gargalos na energia: TONI SCIARRETTA of the Folha de S. Paulo offers news analysis of the biggest business story in the pipeline at the moment — the auctioning off of CESP, the Electrical Company of São Paulo.

Headline: “CESP shines light on bottlenecks in energy sector.”

There was an interesting analysis of the deal in CartaCapital this week as well. I will to try to clip some more, time permitting. The unions and the PT political party are dead set against it, and shrieking fairly loudly.

The PSDB governor apparently intends to use the proceeds to get a prime objective accomplished without going into debt to do it: Finishing the freaking Rodoanel (“beltway”) highway project, a notoriously eternally rusting “half-sunk, a shatter’d visage lies” Malufian boondoogle in a city that is drowning in automobiles.

(We were walking down the sidewalk the other day by a gas station. A driver wanting to pull into the gas station faster simply drove up onto the sidewalk rather than waiting for the signal to turn so he could move along the roadway. You heard me: The fucker DROVE UP ONTO THE SIDEWALK, proceeding maybe 25 meters along the dedicated foot traffic lane. It was our job to get the hell out of the way or be cut down in the prime of our life.

This is not an exceptional occurrence. The São Paulo pedestrian is fair game. And the game is Grand Theft Auto.)

I cannot claim to be fully informed on this plan, or the long and convoluted history of the debate over privatizations here, but naively speaking, the plan does not seem to be completely insane on the face of it. If it works.

And the federal government (President Squid) is said to support it.

I mean, you can point to privatizations here that seem to have been structured to maximize rent-seeking behavior by the winners of the auctions (Telefreakingfônica). And then there are those theories that you can and should structure privatizations to actually capture those private-sector efficiencies you hear about in a way that would benefit the public.

I just think it would be nice if those theories were correct and this deal produced the intended benefits. Delfim Netto has been making this general point a lot lately, it seems to me.

Me and my patroa are domestic consumers of electrical energy here, after all. And it can be an insane (KAFKAESQUE ATTEMPTS TO CORRECT GROTESQUE BILLING ERRORS!) and sometimes frightening (EXPLODING ELECTRICAL TRANSFORMERS!) experience

Marcado para a próxima quarta-feira, o leilão de privatização da Cesp, a terceira maior geradora brasileira, reabriu as discussões em torno do modelo de comercialização de energia e de regulação do setor no Brasil, país em que um crescimento robusto pode esbarrar na falta de eletricidade.

Scheduled for Wednesday, the auctioning off of CESP, the third largest electrical generation company in Brazil, has reopened debate about the model for marketing energy and regulating the sector in Brazil, a country whose robust growth could come to grief because of electricity shortages.

A country an amazing percentage of whose production flows off into the land of gatos — clandestine hookups and the informal economy, which a recent study shows accounts for maybe 40% of GDP.

Which makes planning difficult.

But your salt of the earth Brazilienses tend to feel that if TV Globo — downloaded off the pirate satellite onto the big old parabólica back there in the quintal with the clucking galinhas waiting to be boiled into canja (the local version of “Jewish penicillin”) — will insist on showing them endless scenes of fabulous people with home entertainment centers and gleaming, antiseptic white-porcelain flush toilets, then they ought to have the same thing in their humble barracos, ranchos, palafitas and malocas.

By hook or by crook. And why should they not? The amount of water flowing downhill from the Andes to the Atlantic here is staggering. Staggering on a planetary scale.

The problem here is not lack of resources or options.

We ate an upscale health food restaurant recently in an upscale São Paulo neighborhood. We happened to notice that the joint looked to be 100% gato-powered.

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High-voltage risk transfer. “Brazil is not for beginners” –Tom Jobim

Além de gargalos regulatórios, como as regras deficientes para renovação das concessões, as elétricas enfrentam ainda um sistema de formação de de preços que dificulta o planejamento de fornecedores e dos consumidores, entre eles indústrias intensivas em energia, como as siderúrgicas. Parte dos preços é regulada, e o restante, em tese, livre, formado nos leilões de energia, que têm preços máximos.

Besides the regulatory bottlenecks, such as a lack of effective rulemaking on renewal of concessions, the generators also face a pricing system that makes planning difficult for suppliers and consumers, among them energy-intensive industries like mining firms. Some of the prices are regulatory, some, in theory, are set by the market in energy auctions with price ceilings.

I am trying to study that system a bit. I will let you know when I think I actually know enough about it to say something useful. Not yet, though.

O resultado dessas incertezas pode redundar no fracasso da venda da Cesp. Se concretizado, será o maior leilão de privatização desde a venda do Banespa, em 2000. Os concorrentes não confirmam sua participação no leilão, sob a alegação de que o preço pode não compensar os riscos assumidos.

The result of these uncertainties could result in the failure of the CESP auction. If it comes off, it will be the biggest privatization auction since the sale of BANESPA (the State Bank of São Paulo) in 2000. The competing bidders will not confirm their participation, saying that the price might not compensate the risks to be assumed.

Not the pleasantest of memories, the BANESPA privatization. The state bank’s signature mini-Empire State Bldg. (gratuitous plug: where our friends Gigi and Sandra had a well-attended sculpture exhibition recently) is still pumping the toxic sludge of political mud-slinging out of its sub-basements.

Não está claro, porém, se esses riscos afastarão realmente os competidores da Cesp ou se a desqualificação faz parte de uma estratégia para diminuir a concorrência e comprá-la pelo menor valor possível. Na disputa, estão a franco-belga Suez/ Tractebel e a brasileira CPFL.

It is not clear, however, whether those risks will really drive off the bidders or whether complaining is part of a strategy to scare off competitors and keep the bidding low. In the dispute are the Franco-Belgian Suez/Tractebel and the Brazilian CPFL.

“Isso acontece em todos os leilões. É uma estratégia para comprar da forma mais barata possível. Nós fixamos um preço mínimo pelo qual vale a pena o Estado se desfazer da Cesp”, disse Mauro Ricardo Costa, secretário da Fazenda, que minimiza o problema das concessões. “Todas serão renovadas.”

“This happens in all auctions. It is a strategy for buying at the lowest possible price. We have fixed a minimum price at which it is worthwhile for the State to get rid of CESP,” said Costa, state treasury secretary, who minimmized the problem with concession renewals. “They will all be renewed.”

Com a oferta de energia apertada em relação à demanda nos próximos quatro anos, a tendência clara é de alta nos preços do setor. O mercado brasileiro de energia cresce 5% ao ano, e as maiores elétricas do mundo passam por uma consolidação sem precedentes, que as impele a explorar mercados novos, como o Brasil. No caso, os riscos regulatórios e de preços representam também oportunidades de entrada em negócios com um preço mais baixo.

With the energy supply tight in relation to demand over the next four years, the obvious tendency is for prices to rise. The Brazilian energy market grows 5% a year, and the biggest electricity companies in the world are going through an unprecedented process of consolidation that drives them to seek out new markets, such as Brazil. In this case, the regulatory and price risks also represent new business opportunities at a favorable cost.

Prevendo pouca concorrência, o governo paulista fixou o preço da Cesp em patamar considerado alto, a R$ 49,75 por ação -na quinta, as ações terminaram a R$ 43,40. O custo total de investimento na aquisição da Cesp chega a R$ 22 bilhões, incluindo a oferta obrigatória aos minoritários, dívidas e investimentos.

Forseeing little competition, the state government fixed the minimum bid at what is considered a high level, R$49.75 per share — on Thursday, shares closed out at R$43.40. The total investment for the company acquiring CESP will be R$22 billion, including debt, capital investments, and the mandatory tag-along for minority shareholders.

O preço enfureceu os concorrentes, que desde sua fixação têm pressionado para diminuir o valor da aquisição. No mercado, comenta-se que alguns bancos fizeram operações financeiras sofisticadas de “aluguel de ações”, com o objetivo de derrubar o preço dos papéis.

This price infuriated the bidders, who have been pressuring to lower it since it was fixed. In the markets, it is said that some banks conducted sophisticated “securities lending” transactions in order to drive down the price of the paper.

It is said by whom?

Can you get a bidder to express fury on the record, or produce correspondence using fury words to back this statement? Not that it is implausible, mind you.

O governo paulista afirma que decidiu vender a Cesp não por uma necessidade de caixa, mas para viabilizar seu programa de investimentos em infra-estrutura de transporte, uma vez que o setor privado tem interesse em explorar e em investir em energia.

The state government says it decided to sell CESP not because it needs the cash but in order to fund its program of investments in transportation infrastructure, given that the private sector is interested in operating and investing in energy.

“Dá para esperar mais cinco anos até resolver o problema das concessões? Pergunte ao usuário de metrô se ele pode esperar mais cinco anos para ter uma nova linha. Pergunte ao passageiro da CPTM se ele pode esperar cinco anos para converter o trem de superfície em metrô. Pergunte à população se dá para esperar dois ou três anos para ter coleta e tratamento de esgoto”, diz Costa.

“Can we can wait another five years to resolve the question of the concession renewals? Ask the subway rider if he can wait another five years to have a new line. Ask the CPTM passenger if he can wait five years to convert the surface train to a subway. Ask the population if they can wait two or three years to get garbage collection and sewage treatment,” Costa said.

What do you think? I thought that was a fairly clearly written risk-management analysis for dummies. It only cites one source on the record, though.

And what is your source on the nefarious securities lending gambit in the service of Shorty? I was just reading up on local rules on securities lending recently …

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