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US power company Duke Energy does not plan any new investments in Brazil, Argentina or Bolivia in the short term because of regulatory and economic troubles, the company’s Southern Cone president Mickey Peters has said.
While Argentina’s economy is still facing trouble because of a recent default on its international debt and Bolivia is revising its hydrocarbon laws following political upheaval, Brazil is putting in place a new regulatory framework following power rationing in 2001 and 2002.
The Charlotte, North Carolina company’s net income rose to US$738mn in the first half of 2004 from US$639mn in the same period of 2003.
“Because of Duke’s good results, there is capital available to invest,” he said. “It’s a shame I cannot go to Charlotte and get some of that money for Brazil.”
Asked if Duke would invest in Argentina or Bolivia, he said, “Compared to Brazil, both Argentina and Bolivia are worse off, so no.”
Duke has invested R1.5bn (US$491mn) in Brazil since it bought generator Cesp Paranapanema in 1999. The company invested in capacity expansion and now has 2,000MW installed capacity in eight hydroelectric plants.
“Our original plan was to make an initial investment and expand,” he said, adding that the company is using its local cashflow for maintenance investments of some R5mn in 2004.
Duke has about 2.5% of Brazil’s generation market and had planned to reach some 10% through new projects and acquisitions, he said. Now these plans are on hold until the company can get the returns on investment it had targeted.
“We are not doing well enough. We are not losing money, but the rate of return is not sufficient to stimulate new investment,” he said, adding that the company has no plans to divest from Brazil either.
Strong currency devaluation in 2002, as well as the 2001-02 power rationing, reduced overall returns in Brazil’s power sector. Because consumption has not rebounded yet, there is at present an excess power supply of about 15%, which reduces power prices, Peters said.
“The foreign exchange risk and the market risk we knew and accepted; we are not complaining about that,” he said. Recent changes in regulations and the behaviour of power sector regulator Aneel were factors that raised risk, he added.
The recently determined power sector rules determine that all electricity be sold through power auctions, separated between tenders for existing capacity and for new capacity. The latter group includes unfinished projects and projects authorised since 2000 and that are operating, but lacking long-term power contracts.
Since Duke bought assets that were already operational, it will have to sell power in auctions for existing power, competing with older, amortized plants of state-controlled generators that make up 80% of Brazil’s generation capacity and can sell power at very low prices.
“We never expected a segmented market,” Peters said, considering that having to compete with the amortized plants is unfair since Duke’s investments have not been paid off.
Duke has to seek new long-term contracts for the 20-30% of generation capacity that is not currently contracted and for the 25% of its contracts that will expire in 2005, Peters said.