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Cablegate: More Doubts About Energy Investment in Brazil

This record is a partial extract of the original cable. The full text of the original cable is not available.

UNCLAS SECTION 01 OF 02 BRASILIA 003773

SIPDIS

SENSITIVE

NSC FOR SHANNON
STATE FOR WHA/BSC
STATE PASS OPIC FOR BMCGUIRE/GPOHREN
DOE FOR GWARD
COMMERCE FOR 4332/WBASTIAN/JANDERSON/TSHIELDS
3134/010/DEVITO/ANDERSON/CREATORE

E.O. 12958: N/A
TAGS: ENRG EINV EFIN PGOV ECON BR
SUBJECT: MORE DOUBTS ABOUT ENERGY INVESTMENT IN BRAZIL

REF: A. BRASILIA 3405
B. BRASILIA 2859

Sensitive but unclassified, please protect accordingly.

1. (SBU) SUMMARY: A visiting OPIC/private sector
delegation found scant reassurance about Brazil's New Energy
Model or investing in Brazil's energy sector during November
19 meetings with Brazil's energy regulatory agency (ANEEL)
and the Ministry of Mines and Energy (MME). ANEEL's
Superintendent called into doubt whether the GOB's energy
model offered investors any safety. An MME rep defended the
policy to the OPIC delegation, but refused to be drawn out on
specifics. The ANEEL criticisms and MME's failure to deal in
specifics left the impression of a policy adrift. End
Summary.

2. (SBU) Superintendent Cristiano Amaral of the National
Electrical Energy Agency (ANEEL) opined that Brazil's New
Energy Model (Ref. A) does not give private investors any
type of security. Amaral said the public consultation phase,
which will end within the next two weeks, will not net great
changes to boost investors' confidence. He pointed out that
80% of generation plants are publicly owned, and the primary
Brazilian state-owned company Eletrobras will keep the
"lion's share" of the capacity. Amaral added, "At the
present time, it is very difficult to say if it is safe to
invest. Even construction under some existing concessions of
hydro-plants have stopped." The market uncertainty is
discouraging energy sector investment. Despite this fact, he
said there will be 3000 megawatts of new generating capacity
completed this year, equaling 10% of installed capacity. In
a telling sign, these are primarily small power plants built
by private companies to meet their own needs.

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3. (SBU) Brazil's New Energy Model is expected to be
presented to Congress within the next two weeks, but would
not take effect until 2005. Ministry of Mines and Energy
Executive Secretary Mauricio Tolmasquim told the press
recently that there would not be enough energy liberated from
existing contracts to be directed into the energy pool
created under the New Energy Model until then. Amaral has
reservations about the model, and believes it will
metamorphose one from allowing Independent Power Producers
(IPPs) to find markets along side the blended energy pool
into a single pool/single buyer system. He expects the lower
pool prices, driven by the already-amortorized power plants,
will force IPPs and free consumers to participate in the
pool. Amaral hopes that political pressures will transform
the New Energy Model into a more reasonable law that
encourages foreign investment and protects IPPs.

4. (U) Amaral said that the renewable energy program is a
bright spot in the sector, since small renewable plants can
operate outside of the energy pool under the New Energy
Model. Renewable energy operations are assessed half of the
transmission tariffs, and Eletrobras guarantees a minimum
price. These incentives are granted for any renewable energy
plant generating under 30 megawatts. Currently, 100 wind
projects have permits under this program.

5. (U) Ministry of Mines and Energy Program Director Maria
Passos, in contrast, claimed energy sector investment is
still flowing from Spain, Portugal, and France. Passos said
that the Lula administration's sound macroeconomic policies
and New Energy Model offer security to foreign investors.
The model establishes rules, offers consistency in planning,
and stability in regulation, she said. When asked to expound
upon the details of the model, Passos demurred, replying that
only MME Minister Rousseff and Executive Secretary Tolmasquim
could talk about specifics. Moreover, the GOB would not
provide exchange rate or inflation guarantees under the new
model, as these are too risky.

6. (SBU) COMMENT: The tone of Amaral's criticism of the
energy model may have been occasioned in part by tensions
over the GOB's efforts to reform the independent regulatory
agencies (Ref. B). The substance of his criticism, however,
is right on the mark. Moreover, given a chance to defend its
policy, our GOB interlocutors failed to provide the sort of
specifics that would reassure potential investors. Based on
what we have seen to date, the new energy model appears
unlikely to attract significant new investment to the crucial
power sector.

HRINAK

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