Volume 5, Number 9, Page 1
Privatization of Electric Power in Latin America
by Julian Nihill
While the main story in Latin American electric power in 1997 was the acceleration of privatization programs in Brazil, Colombia and Peru, the more interesting secondary story is the emergence of a concern about monopolistic practices, especially with regard to the Spanish and Chilean electric powerhouses. The recent history of private electric power in Latin America is a textbook example of the success, and failure, of a free-enterprise system. The early market entrants have developed the size and skill to compete more effectively. As new markets have opened, the leaders have used this competitive advantage to gain a market share and to establish positions that have or could have monopolistic tendencies. The regulators have responded by passing laws aimed at keeping the markets free and competitive.
Chile’s Early Lead
Beginning with the sale in 1980 of Saesa and Frontel, two distribution companies, Chile has systematically privatized the bulk of its electric generation, transmission and distribution systems, requiring in Decree No. 1 of 1982 that ownership of the three functions be separate. By the end of 1997, over 80% of the generation and transmission function was in private hands and, according to sources within the Chilean government, even the remaining entities will be privatized by the year 2000.
Two major players have emerged in the Chilean market: Endesa, with over 60% of the generation capacity in Chile and, through its subsidiary Transelec, most of the transmission; and Enersis, primarily a distribution company, but also a 25% owner of Endesa. Chilgener (generation) is a distant third. With Chile’s pension funds realizing explosive growth as a result of the privatization of social security in 1981, and the ability of those funds to invest in the electric companies since 1985, these electric companies have had an almost unlimited access to equity capital. In July 1997, Chilgener announced expansion plans for investment in Latin America of over $3.3 billion; Endesa announced it would invest $2.6 billion abroad; Enersis agreed to a $1 billion capital infusion from Endesa España (a Spanish company); and Colbun, S.A. (generation) announced plans in August 1997 for a capital increase, possibly including an ADR offering. The investment by Endesa España in Enersis and the related purchase by Endesa España of the so-called "Chispas" shares of Enersis, which resulted in Endesa España having three of the seven Board members of Enersis, raised eyebrows throughout Latin America because Endesa España is already a significant shareholder in the other Chilean giant, Endesa Chile.
The Latin American Explosion
While the Chilean companies are clearly market leaders, they are not the only game in town. In August 1992, the Argentine government revamped the Electric Energy Law and promulgated regulations for the privatization of the electric sector. Approximately 80% of Argentina’s non-nuclear electric infrastructure is now in private hands. The Overseas Development Agency estimates that by the year 2010 Argentina will add approximately 8,000 Megawatts to its current electric generation capacity, representing an investment of about $12 billion in generation alone. The year 1997 saw the privatization of Eseba, Buenos Aires’ electric distribution system, a portion of which was awarded to an AES-based consortium and another portion to a consortium involving Camuzzi, Loma Negra and United Utilities. Projects anticipated for 1998 and 1999 include the distribution systems of Neuquen, Energia de Mendoza, Yacytera and Pichin Picun. Additionally, the government has announced plans for the privatization of the three nuclear plants it owns, two of which are operating (Emblase and Atucha I) and one which is under construction (Atucha II). The first two plants presently generate between 11% and 12% of the total electric energy generated in Argentina.
If the Chilean and Argentine privatizations are largely complete, where then is the action in 1998 and 1999? Colombia and Peru have both embarked on ambitious programs recently. In keeping with its free enterprise philosophy, Peru has adopted a total privatization approach. The Electricity Concessions Law, enacted in 1992, provided the framework for private ownership of generation, transmission and distribution, with a general prohibition in Article 122 against simultaneously performing all three functions. In 1996, PROMCEPRI, the Commission for Promotion of Private Concessions, was formed, and in 1996 and 1997 several distribution and generation companies were privatized. Endesa España and the Chilean companies won most of the important bids. In January 1998, the Peruvian government announced the long-delayed award of the contract to build and operate the Mantaro-Socabaya transmission line which will link the grids in the north and south of Peru. Although planned with the assistance of U.K. and U.S. advisers, the contract was repeatedly delayed because of problems with its financeability. Some of the problems are inherent in the Peruvian privatization model which requires a recalculation of the total transmission charge every four years, based in part on a somewhat arbitrary "New Replacement Value." Further, the law requires each generator to pay a portion of the total transmission cost based on its "effective capacity," but fails to provide an adequate remedy for the transmission companies if a given generator fails to pay its share. These problems were ultimately mitigated by a government guarantee of the difference between a rate of return set at the time of the bid and the rate of return resulting from the calculations mandated by the law; but the risk of default by a generator or other financing problems remained.
By contrast, Colombia has adopted a less free-market solution, preferring to retain the transmission function, or at least a substantial equity interest in transmission companies, in the hands of the government. This approach is motivated by a sense that transmission is of strategic importance. Interestingly, Peru has also begun raising questions about the strategic importance of the entire electric sector, as evidenced by the extension, in November 1997, of the so-called "golden share" law to electricity companies. This law requires the government to retain a class of shares, with certain defined veto rights, in privatized companies in the hydrocarbon and electricity sectors. Generation and distribution are not perceived in the same light, and during 1997 the Colombian government split Bogotá’s electric generation and distribution company into a generation company, Emgesa, and a distribution company, Codensa. Capital Energía, S.A., a consortium of Endesa Chile and Endesa España, purchased a 48% interest in Emgesa for $952 million; and a consortium of two Chilean companies (Enersis and Chilectra S.A.) and Endesa España purchased a 48% interest in Codensa for $1.226 billion.
Bolstered by the success of the partial sale of the Bogotá company, the Colombian government has plans to raise private capital for several other companies. These plans include the following: sale of up to 25% of the equity of Interconexión Eléctrica, S.A. (transmission); sale of an equity interest in Electrificadora del Tolima S.A., (distribution); creation and sale of a new generation company to own and operate the Prado Hydroelectric plant; sale of the government’s interest in Energía del Quindio (distribution); sale of control in the generation and distribution functions of Corporación Electric de la Costa Atlántica, S.A., and sale of a minority interest in that company’s transmission function; and plans for raising some level of public capital for the companies that perform distribution in the Cauca, Chocó and Naviño regions.
Sources close to the government have informed us that the government is seeking ways in which to broaden the investor base in the electric sector to include the general public. To this end, the government is considering, in the Interconexión Eléctrica sale, setting aside a block of shares that may be purchased only by persons investing less than $10,000, providing mechanisms to permit such small investors to hedge their investment against depreciation, and rewarding investors who stay in for the long term.
Mexico
With all the activity in South America, what has been happening to Mexico, possibly the richest prize of all the Spanish-speaking countries? After an initial flurry of activity surrounding the publication of amendments to the Electricity Law in 1995, Mexico has remained relatively quiet. With the exception of a few inside-the-fence projects, the transmission and distribution of electricity remains totally owned and controlled by the government. While some high profile greenfield generation projects have been awarded, most notably Merida III in 1997, Samalayuca in 1994, and Altamira in 1996, these have all involved fixed power purchase agreements with governmental entities and are a long way from a pure private model. The reason for Mexico’s reluctance to join the Latin American explosion is primarily political. Although the politics of the "new PRI" and President Zedillo’s administration generally favor private enterprise, the Commission Federal de Electricidad ("CFE") has remained one of the bastions of "old-PRI" thinking. There are signs that a change may be on the horizon. Luis Telles, one of the most respected technocrats to emerge from the Salinas administration and the former Under Secretary of Agriculture, has recently been appointed Minister of Energy. Offsetting this development is the fact that in 1997 the PRI lost control of Congress for the first time in 65 years, with a significant plurality now held by the leftist leaning PRD; consequently it may be more difficult for the PRI to effect a change, even if it finally desires to do so.
New Anti-Monopoly Laws
As mentioned at the beginning of this article, the Latin American explosion has been textbook free enterprise. The Chilean companies, with the longest experience in Latin America, an enormous ability to tap into capital markets at home and abroad, the willingness to take the Latin American market risk, and, recently, the ability to connect systems throughout the continent and achieve economics of scale, have emerged as market leaders.
Endesa Chile, majority owned by Endesa España, controls about 2500 MW (or 60%) of Chile’s generation capacity and another 5,000 MW in other Latin American companies, including recent investments in the Cachoeira Dourada hydroelectric plant near Brasilia, the Emgesa investment and the purchase of the Betania hydroelectric plant in Colombia, and its investments in Edegel (Peru) and Edesen and Central Costanera in Argentina. Enersis, which also has significant investment from Endesa España, recently joined Chilectra, Electricidade de Portugal and Endesa in acquiring control of CERJ, the Rio de Janeiro electric company. Enersis also has a significant interest in Edegel (Peru), Edesur and Central Costanera (Argentina) and led the consortium that purchased Codensa, the Colombian distribution company.
Partly in response to the Chilean presence, 1997 saw the introduction of special anti-monopoly laws for the electric sector in several countries. The Peruvian response was the most direct. Since 1991, Peru has had a general antitrust law that prohibits abuse of a dominant market position. The 1992 Electrical Concessions Law prohibits simultaneous performance of electrical power generation, transmission and distribution activities by the same holder (of a concession), and in October 1995 the government issued a Supreme Decree prohibiting the acquisition of control of a generation, transmission or distribution company by a company authorized to perform generation, transmission or distribution of electric energy "whose position is dominant in the market," or any persons who control such a dominant entity. In 1996, Enersis, directly and through its subsidiary Chilectra, acquired control of Distrilima, the Lima distribution company, and Endesa Chile controlled Edegel, a large generation company. At the time, Endesa España controlled Etevensa, a thermoelectric generation company in Lima. In November 1997, after Endesa España had acquired a powerful, though not controlling, position in Enersis, the Peruvian Congress, faced now with the possibility that Endesa España would also attempt to enter the transmission business, passed legislation requiring advance notification and approval for any acquisition within the electric industry that would result, directly or indirectly, in a concentration of 15% or more of the market in horizontally integrated operations or 5% of the specific market in the case of vertical integration.
Other countries are following suit. The Argentinean executive branch has announced that it is preparing and will soon submit to Congress a draft of an anti-monopoly law which would affect the electric industry, among others. El Salvador, which privatized the bulk of its electric distribution last year, insisted on multiple participants in the sector. In Colombia, on the other hand, although Article 3 of Law 143 of 1994 prohibits abuse of a dominant position in the market, the Colombian authorities have not used this law to prohibit the apparent concentration of generation and distribution capability in the hands, directly or indirectly, of Endesa España. It will be interesting to see whether Colombia ultimately follows the Peruvian approach.
In conclusion, the level of electric power privatization activity in Latin America is staggering, and, as long as the financial markets hold up, likely to continue. It would be a shame if the powerful position of Endesa España and its Chilean affiliates were to have a chilling effect on the level of competition. It is hoped that as new markets open up, they will keep in focus that the purpose of privatization is to increase efficiency and reduce prices through increased competition, and will enact and enforce well-considered anti-monopoly legislation.
Julian Nihill is with the law firm of Gardere & Wynne in Dallas, Texas. He may be contacted at nihju@gardere.com.
