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Cablegate: President Lula Announces Brazil's New Energy Model

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 003942

SIPDIS

STATE FOR BSC/WHA, EB
NSC FOR DEMPSEY
DOE FOR GWARD

E.O. 12958: N/A
TAGS: ENRG EINV EFIN PGOV ECON BR
SUBJECT: PRESIDENT LULA ANNOUNCES BRAZIL'S NEW ENERGY MODEL

REF: A. BRASILIA 3405
B. BRASILIA 3088
C. BRASILIA 2859

1. President Lula announced Brazil's new energy model and
signed the provisional measures (MP) to implement it on
December 11. The MP was published in the Official Daily of
the Union December 12. The GoB had long reiterated its
intent to introduce the model before year's end, but there
was doubt as to whether it would do so by MP or by
submitting a bill to the legislature. The MP gave the
energy model the full force of the law as written, and was
to be debated in congress within 60 days, with a potential
extension of another 60 days. On January 16, "O Globo"
online reported that the PSDB party had filed a Supreme
Court injunction complaining that to enact the new model via
MP was unconstitutional. The injunction suspends the effect
of the MP until the Supreme Court either decides it is
unconstitutional, which kills the MP, or allows the bill to
move forward, thereby starting the 60-day clock. Still,
Lula's proclamation formally fulfills another major item on
his policy agenda for his first year.

2. Mines and Energy Minister Rousseff, Finance Minister
Palocci, and Chief of Staff Dirceu were all present for the
ceremony, along with presidents of five state-owned
generation companies. Glaringly absent were any company
presidents from the private sector. Brazilian daily 'Valor
Economico' reported December 12 that distributors and
private generating companies were dissatisfied with the
model's "lack of isonomy" (i.e., its purportedly advantaging
state-owned entities over private enterprise in the energy
sector), and chose not to be present.

3. The main tenets of the new energy model unveiled in July
by Rousseff (Ref. C) remain intact. Two contractual
environments are to co-exist: a regulated pool for "captive"
customers, and an unregulated "free" market. The Electric
Energy Trading Chamber (CCEE) is to replace the current
Wholesale Energy Market (MAE) and administer the pool.
Distributors are to purchase energy from the pool via bid,
with the winner being the distributor guaranteeing its
captive consumers the lowest tariffs. Current concession
contracts will be honored to expiration, so that the first
large auction under the new rules should take place in 2005,
when up to 50% of the existing contracts expire. As
concessions for "captive" consumers are granted, CCEE is to
administer bilateral contracts between all sixty-four
distributors and the generators concerned, as described in
ref. c. The "free" environment is to be unregulated, with
the free customers and distributors able to negotiate their
own contracts. Generators, 80% of which are still publicly-
owned, will be the only entities allowed to contract in both
environments.

4. The Ministry of Mines and Energy (MME) will grant
generation concessions. Those concessions are to be
auctioned in megawatt blocks, rather than by project as they
are now. Auctions of both generation and transmission
concessions will be conducted through ANEEL based on the
regulations of, and with oversight from, the National
Council for Energy Policy (CNPE) -- an existing body that is
controlled by MME.

5. The National Operator of Electrical Systems (ONS) is to
remain responsible for the coordination and control of
generation and transmission operations, and for
administration the contracting of transmission installation.
Currently, ONS is an industry entity, but under the new
energy model three of five directors will be selected by
MME, and the other two by the private sector. The
directors' current two-year mandates will change to four-
year terms.

6. Two planning bureaucracies are to be set up: the
Electricity Sector Monitoring Committee (CMSE), which will
monitor the sector's ability to meet energy needs in the
short term (5 years); and the Energy Research Company (EPE),
which will be responsible for medium and long-term planning
(up to twenty years) for energy expansion. EPE will also
establish requirements for the safety reserve.

7. Early reaction in the press is that the new energy model
puts a damper on foreign investment and strengthens the
power of the state. Claudio Sales, president of CBIEE, an
association of the 15 largest private investors in the
energy sector, told 'Valor' December 12 that the
concentration of decision-making and regulation would be in
the hands of MME and state-owned Electrobras, which opens
the door to political pressure on the sector. A headline in
the December 14 edition of 'O Estado de Sao Paulo'
proclaimed, "For the Market, Only the State Will Invest in
the Sector". Andre Valle, post-graduate energy coordinator
at the Getulio Vargas Foundation, told 'Estado' that the
government must now prove it has money to pump into the
electrical sector; the new rules discourage private
investment, especially foreign investment.

8. Mission will follow up with more industry reaction and
analysis on the new energy model as extra detail emerges.

HRINAK

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