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Cablegate: How Brazil Is Wired - Electricity Series #1

VZCZCXRO5497
RR RUEHRG
DE RUEHBR #0593/01 1261424
ZNR UUUUU ZZH
R 051424Z MAY 08
FM AMEMBASSY BRASILIA
TO RUEHC/SECSTATE WASHDC 1555
INFO RUEHSO/AMCONSUL SAO PAULO 1980
RUEHRG/AMCONSUL RECIFE 7982
RUEHRI/AMCONSUL RIO DE JANEIRO 6100
RUEHBU/AMEMBASSY BUENOS AIRES 5464
RUEHAC/AMEMBASSY ASUNCION 6743
RUEHMN/AMEMBASSY MONTEVIDEO 7335
RUEHSG/AMEMBASSY SANTIAGO 0288
RUEHLP/AMEMBASSY LA PAZ 6137
RUEHSG/AMEMBASSY SANTIAGO 0289
RUCPDOC/USDOC WASHDC
RUEATRS/DEPT OF TREASURY WASHDC
RHEHNSC/WHITE HOUSE NATIONAL SECURITY COUNCIL WASHDC
RHEBAAA/DEPT OF ENERGY WASHDC

UNCLAS SECTION 01 OF 03 BRASILIA 000593

STATE PASS USTR FOR KDUCKWORTH
STATE PASS EXIMBANK
STATE PASS OPIC FOR DMORONSE, NRIVERA, CMERVENNE
DEPT OF TREASURY FOR JHOEK
DEPT OF ENERGY FOR CGAY, RDAVIS
DOC FOR ADRISCOLL ITA/OLC

SENSITIVE
SIPDIS

E.O. 12958: N/A
TAGS: ENRG ECON EINV BR
SUBJECT: HOW BRAZIL IS WIRED - ELECTRICITY SERIES #1


SENSITIVE BUT UNCLASSIFED--PLEASE PROTECT ACCORDINGLY

REF: A: Sao Paulo 0031; B: La Paz 0462; C: 06 Sao Paulo 1059

1. SUMMARY: (U) This year will mark ten years since the
denationalization of Brazil's electrical sector after fifty years of
state control. The sector has undergone many changes during this
period: from the days of former president Fernando Henrique
Cardoso's ambitious drive to privatize the entire sector beginning
in 1995; to the national energy crisis of 2001 which led to
rationing; to the stalling of privatization efforts under the Lula
administration; to the current situation with a fully subscribed
system straining the limits of its infrastructure. As Brazil seeks
to maintain and even improve upon its recent 5.4% GDP growth,
electrical supply will present a continuing challenge and perhaps
limitation. Mission Brazil will examine this sector in a series of
cables to include the threat of a pending energy crisis, the effect
of regional and international relations on the Brazilian energy
sector, and the future of electrical generation and supply in
Brazil. This first report focuses on the overall structure of the
sector and serves as a reference resource for septels. END SUMMARY.


-------------------------------
Policy and Regulatory Structure
-------------------------------

2. (U) Although much of the electrical sector has been privatized in
the past ten years, the GOB still retains a central and leading role
throughout the system. Policy is directed from a ministerial
committee called the National Council for Energy Policy (CNPE). The
CNPE leads energy policy and provides guidance to the Ministry of
Mines and Energy (MME) which sets electrical policy. MME's two arms
which carry out this policy guidance are the Committee for
Electrical Sector Monitoring (CMSE), tasked with assuring the
security of electrical supply, and the Corporation for Energy
Research (EPE), responsible for planning energy sector expansion.

3. (U) The regulatory agency, ANEEL, is nominally independent, but
in fact reports to the Minister of Mines and Energy. ANEEL is
charged with running the auctions for new contracts for electrical
generation and regulating the prices of transmission and
distribution. ANEEL calculates tariffs annually based on the
investments and costs incurred by electricity providers during the
delivery of services. Using these figures, they follow the
concession contracts that are issued by the National Destatization
Council (which was responsible for setting the terms of private
sector involvement in the process of privatizing the state-owned
resources) to determine tariffs. ANEEL General Director Jerson
Kelman told Econoff that the process rewards concessionaires'
efficiency in maximizing use of their investments for higher
productivity. ANEEL also factors in an index of customer
satisfaction, allowing the better performing companies to retain a
higher share of profits.

4. (U) At the time of ANEEL's creation in 1996, the average
Brazilian consumer experienced interruptions in energy supply an
average of 21 times per year, for a total of over 26 hours. Now,
ANEEL proudly notes that it receives less than a quarter of the
amount of service complaints that it received at its inception and
consumers now experience 11.7 interruptions with a loss of
approximately 16 hours; averages that have remained relatively
consistent since 2002.

5. (U) Brazil's central operating system is run by the National
Operator for the Electric system (ONS). ONS is responsible for the
integration of the system and insuring the continuous generation,
transmission, and distribution of electricity throughout the
country. The final institution involved in the Brazilian electrical
structure is the arm of the government responsible for the
commercialization of electricity, the Chamber of Commercialization
of Electrical Energy (CCEE). Much of the electrical system is owned

BRASILIA 00000593 002 OF 003


by the state electric company, Eletrobras.

6. (SBU) At the top of this labyrinthine system is the new head of
MME, Minister Edison Lobco, a former journalist and politician with
no particular energy expertise. He has pledged to surround himself
by subject matter experts (appointments so far bear this out) and
most sector observers tell us that since the position requires
political skills more than subject matter expertise, they are
comfortable with this. In a recent meeting with the Brazil-U.S.
Business Council and separately with El Paso Energy, he avowed
himself to be a friend to industry and in favor of power sector
privatization. He also stressed the importance he places on
transparency in Ministry decision-making. In a recent Seminar in
Rio, Minister Lobco emphasized that the MME has to be obsessive
towards honoring contracts to avoid investor's skepticism (Note: In
a courtesy call with the Ambassador, Lobco also struck us as
straightforward and positively inclined towards the U.S. End
Note.)


-------------------------
Generation Capacity
-------------------------

7. (U) Brazil's 172 power plants (hydroelectric and thermal,
including two nuclear plants) are operated by 80 different agents,
public and private. In planning for the next five years, ONS
predicts only moderate shifts in sources of generation.
Conventional thermo power will rise from 11,600 MW (12%) of
installed capacity to 17,000 MW (16%) whereas hydroelectric power
which currently represents 83% of installed capacity at 81,500 MW,
will decrease to just under 80% of the share, projected to be 85,000
MW in 2011. Because hydroelectric power is much cheaper to produce,
hydro made up 93% of the amount of electricity actually generated
for 2007. Nuclear capacity will remain the same for the short term
contributing just 2% to the electrical supply. The sugar cane
industry association (UNICA) also indicates that they will increase
the production of electricity through bagasse. (Specifics on
electrical generation and future plans will be reported septels.)

-----------------------------
Transmission - SIN and Chavez
-----------------------------

8. (U) The transmission of electricity in Brazil is handled by 52
different agents with over 81,000 kilometers of transmission lines,
731 circuits, and 367 substations. The vast majority of the country
is covered by the integrated transmission system (SIN) operated by
ONS. Any lines that transmit over 230 kilovolts must be made
available to ONS as part of the SIN. Only a small portion of the
population is outside of the grid currently. A substantial part of
the unintegrated areas will be brought into the system this year.
The linkage of the northwestern states of Acre and Rondtnia to Mato
Grosso is expected to be completed by 2010, with more areas in
Manaus and Amapa in the north of Brazil being incorporated by 2012.
This will complet the integration plan but will leave the remote
brder state of Roraima out of the integrated system Roraima will
continue to be dependent on Venezela as its source of power.

9. (U) This integrted transmission system means that even though
rgions such as the Northeast do not receive sufficiet rains to
generate their own electricity, they re able to get 40% of their
electricity from themore abundant hydropower of the southeastern
poplation centers. The transmission system permits oficials to
compensate for rainfall shortages in sme areas, by directing energy
from others. It aso means that a significant portion of the
Braziian population is vulnerable to energy loss from beaks in the
transmission lines. Brazil's two lagest cities are dependent on
the transmission lin from the Itaipu dam. "If something happens to
he Itaipu line," energy consultant Hector Morreno old Econoff,
"Rio and Sao Paulo would go black."In Morreno's estimation, "Brazil
still has a lon way to go" in improving transmission.

BRASILIA 00000593 003 OF 003

10. (U) As the GOB is looking at ways to diversify its sources of
electrical energy, the transmission system will be critical in
facilitating that change. Currently, the main impediment to
incorporating bioelectricity produced from ethanol plants into the
grid is that the sugar mills in Mato Grosso do Sul and Sao Paulo
states are not integrated into the transmission lines. To address
this limitation, the GOB is in discussions with state governments
and producers to determine how to fund new transmission lines.


----------------
Distribution
----------------

11. (U) The distribution system is dominated by private industry
with 106 different distributors involved. Of the actual cost passed
on to consumers, a portion goes to taxes which include the cost of
programs such as "Luz para todos," a government program similar to
rural electrification, and another assistance program that
subsidizes electricity for poor families. (Note: "Luz para todos"
or Light for All is a program sponsored in part by USAID. End
Note.)

12. (SBU) ABRACEEL's Pedrosa believes that some of this year's
concern over a possible energy shortage (which experts now agree
will not happen this year), could have been alleviated if free
market forces were brought to bear. He told Econoff that the demand
level could have self-corrected if changes in the electrical supply,
such as the Argentina's inability to fulfill its contract to sell
6,000 MW of electricity to Brazil, had been passed along to
consumers allowing the price to fluctuate in a market-driven way.
Pedrosa notes that the cost will eventually be passed along in later
years through higher direct energy costs or more expensive national
products. Alexandre Innecco, CFO of AES Electropaulo in Sao Paulo,
shared Pedrosa's view of market distortion, telling Econoff that,
because of the pricing structure, consumers have no price signal to
reduce consumption.

13. (SBU) COMMENT: As the GOB seeks to expand its electrical supply
capabilities with diverse sources, it will face numerous challenges.
One issue the GOB will have to decide is whether to continue
privatization efforts or consolidate. The recently approved "Super
Eletrobras" bill, which removes the requirement that the state owned
electric company not own more than 49.19% of energy consortiums,
gives rise to speculation about the prospects for further
privatization. Meanwhile, Brazil must begin to diversify their
sources, as the current hydro-heavy matrix is highly vulnerable to
drought, with the specter of rationing or blackouts looming during
less than sufficient rainy seasons. Energy security is a growing
concern throughout the Southern Cone region and, accordingly,
geo-politics also figures heavily in Brazil's ability to meet its
electricity needs. Each of these issues will be addressed in future
cables in this series. The next cable will focus on the generation
capacity of the Brazilian electrical sector. END COMMENT

14. (U) This cable was jointly produced by Embassy Brasilia,
Consulate Sao Paulo and coordinated throughout the mission.

SOBEL

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