Did Brazil's Lights Just Flicker?

The goverment is scrambling to stave off power outages

Brazil's newly appointed Mines & Energy Minister is not above groveling for gigawatts. In April, José Jorge de Vasconcelos took to the airwaves to exhort Brazilians to conserve electricity. "Don't take a hot shower for too long," pleaded the bespectacled minister in one TV spot. "Let's use the iron and the air conditioning in a cost-effective way!" The ads are part of a $10 million campaign to prepare the public for possible power rationing.

Indeed, the threat of blackouts is all too real in Latin America's biggest economy. With reservoirs in the heavily industrialized southeast less than one-third full, electricity rationing could begin as early as May. In a recent survey by the Industrial Federation of the State of São Paulo (FIESP), executives cited the looming energy shortages as a top concern. "This is what keeps them awake at night," says Clarice Messer, an economist at FIESP.

Rationing could also short-circuit Brazil's hopes of hitting at least 4% growth this year. "The most likely scenario is a reduction in the range of 0.3% to 0.8%," says Andre Loes, chief economist at Banco Santander Central Hispano in São Paulo.

DROUGHT. Several factors have conspired to push Brazil to the brink of a power crisis. For starters, demand for electricity has been surging at an annual rate of 4.5% since 1995, while growth in supply has averaged only 3.8% a year, according to the National Development Bank. Then there's Brazil's acute dependency on hydroelectricity: Water-powered turbines account for more than 80% of its 72,000-megawatt capacity.

When Brazilian engineers were busy designing massive hydroelectric projects, they never envisioned a lack of water could one day become a problem. Now it has. Brazil's center-west, as well as the entire coast, has suffered a chronic shortfall in rain for the past four years.

Brazil's power industry is also feeling the effects of too little investment. In the last five years, it received less than half of the $8 billion to $10 billion a year needed to keep up with demand, says Paulo Feldmann, vice-president at Ernst & Young in São Paulo. That's partly because privatization of state-owned electricity assets has run out of steam. Most distribution companies have been sold, but nearly 80% of the generators remain in government hands. Some politicians would like it to stay that way: Congress is now considering legislation to block the sale of three large utilities owned by the federal government. With presidential elections slated for October, 2002, opposition parties are eager to capitalize on voters' growing resistance to privatization, on the grounds that it often leads to higher prices and layoffs.

The decision to float the real in 1999 was another blow to private investment. While power companies must pay in U.S. dollars for the equipment in their plants, along with the natural gas to power them, they must bill their customers in the domestic currency. That may explain why AES Corp., based in Arlington, Va., is the only foreign company to have completed a large gas-powered station so far. A total of 49 such projects, amounting to 2,300 Mw in new capacity, are in the works, but only a few will come onstream before yearend.

Brazil's electricity industry would probably be a bigger draw for foreigners if the government was to free prices. According to Luiz David Travesso, president of AES's Brazilian subsidiary, the cost of the electricity that AES buys from Itaipú, a state-owned hydroelectric plant, to resell to industrial and residential customers has risen by more than 20% since January. Yet regulators will not allow the distributors that the company controls to hike their rates until July at the earliest. "This is a disincentive to new investment," Travesso says.

Total deregulation is scheduled for 2006. In the meantime, some sort of compromise is urgently needed. Brazilian officials figure that overall power consumption must come down 10% to avoid shortages in the coming weeks. As part of its conservation campaign, the government has directed civil servants to shut off their computers promptly at 5 p.m. But that may not be enough to keep Brazil's Energy Minister in crisply ironed shirts for his next TV appearance.

By Thierry Ogier in São Paulo

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