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The Mae is dead! Long live the Mae!

Prospects have improved considerably for Brazil's energy sector since the government replaced the self-regulating Mercado Atacadista de Energia (MAE) with a new government- controlled entity last year, according to Matthew Fowler of Coudert Brothers. Governmental reorganisation of the company and the market conditions that govern it have created a fertile energy sector but it remains to be seen if the reforms will translate into a sustainable regulatory framework for Brazil's wholesale energy market.

In the February edition of Currents ,we reviewed the complex and interconnected problems besetting Brazil's wholesale electricity market, the Mercado Atacadista de Energia ("MAE"),and questioned whether the MAE would be able to surmount those problems and resolve the crisis in which it was embroiled.

The Brazilian government settled that question as we went to press on our February 2002 issue by announcing the termination of the self-regulating MAE, and its replacement with a new, government-controlled entity. In the weeks following this announcement, the Brazilian government has developed the general objectives of its ambitious 18- point reform plan by implementing and announcing a number of new measures. Among these is a determination to leave at least one element of the MAE unchanged -its name,which was originally to be changed to the Mercado Brasileiro de Energia ,will remain the Mercado Atacadista de Energia.

Improving Prospects

The government's announcement appears to have come at a time of improving prospects for the Brazilian energy sector. Recent rains have improved the hydrological conditions that reduced output from the country's predominantly hydroelectric generating plants, and the related energy rationing measures were lifted as of March 1,2002. A long-standing dispute triggered by those rationing measures (the "Annex 5 dispute" as described in the February edition of Currents),has also been resolved. The Annex 5 dispute, which involved efforts by both power generators and distributors to avoid responsibility for paying for power that had been purchased under contract but that was not consumed under the rationing program, was resolved in an agreement among the Brazilian government, the generators and the distributors.

The improved environment may be further aided by the government's reorganization of the MAE, which seeks to address a number of other problems that contributed to the collapse of the (old) MAE. One such problem was the inability of electricity distribution companies to fully pass their purchased power costs on to consumers under the existing "price cap" mechanism ("valor normativo"). ANEEL, the energy market regulator, has raised the price cap for energy purchased by distribution companies from gas-fired plants, allowing them to charge higher prices and thereby enhance their ability to recoup their costs under power purchase agreements with thermal generators.

Another problem being addressed by the government is the unequal footing of parties selling so-called "old energy" (power produced by fully-depreciated, government-owned hydro plants)and "new energy"(power produced by new, privately-held,gas-fired and hydro generators)in the same market.Under the government's new measures,old energy will be sold through public auctions instead of the wholesale market, and gas transportation costs will be partially subsidized by the government.

Return to State Control

Whether these proposals translate into a sustainable regulatory framework for Brazil's wholesale energy market remains to be seen. The MAE is currently being regulated directly by ANEEL, and the final terms of the reorganization will not be known until regulations are released, which is anticipated to be some time before the end of the year. In the meantime, Brazil has reversed its trend of increasing private participation in the energy sector: the self-governing wholesale market has been placed under the control of the Brazilian state, plans for the privatization of generation companies have been put on hold, and Brazil's Mining and Energy Ministry, of which ANEEL is an agency, has undertaken efforts "to regain control of the power sector."* On a hopeful note, however, the minister heading Brazil's energy taskforce has stated that his intention is "not to increase state control …in the industry, but to improve conditions for private investment."** In sum, the changes in the MAE are hopeful signs. Government intervention has ameliorated some key risks previously identified by foreign investors. Investment and capital markets will now determine the extent to which these changes result in additional Brazilian power projects.

*"Ministry to Resume Control in Power Sector" Gazeta Mercantil Online, Jan.11, 2002 (translated from Portuguese).

**Collitt,Raymond, "Brazil's Energy Crisis Sparks Reform Plan" Financial Times (London), Jan 17, 2002.

Matthew Fowler is an associate in Coudert Brothers' energy practice in the Washington,D.C.office. He assists domestic and international clients in the structuring and financing of energy-related projects in the United States and overseas. His specialty is in assisting clients with projects located in Latin America in general and Brazil in particular. He is fluent in Spanish and Portuguese.

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