Drought, years of inadequate investment and a half-baked liberalization of its electricity sector have pitched Brazil into a full-blooded energy crisis. Since June, most Brazilian consumers have had to cut their power consumption by 20%.

The botched launch of a spot electricity market in 1999, which might have eased the crisis by helping to balance peak supply and demand for power, has made matters even worse. The Electricity Wholesale Market, known as MAE, was designed as a safety valve for the semi-liberalized power system in which distribution was privatized while generators remained largely under state control. Generators or distributors agreed to supply or offtake commitments with the Brazilian power regulator Aneel. Those that failed to meet their commitments would have to buy power or distribution capacity on the MAE from other companies.

Edivaldo Santana, a superintendent at Aneel, says the independent, self-regulating market could “not establish rules. There were no guarantees or penalties [to limit counterparty risk]. The MAE could not organize itself.” A default in September 1999 by state-owned generator Furnas Centrais Elétricas deadlocked the market when it refused to recognize an R$570 million obligation, equivalent to about $310 million. “The market did not clear a single transaction for a year after [that],” says Santana.

Furnas refused to honor its debt after failing to bring its Angra II nuclear power station on stream as agreed to with Aneel. Furnas pleaded force majeure, refused to buy power on the MAE to meet its commitments, leaving distributors short. A legal battle erupted between Furnas and the distributors. Aneel stood aside, arguing that the MAE is an autonomous body. Furnas has refused to discuss this issue with LatinFinance.

A year ago, Mitsumori Sodeyama, president of the company set up to administer the MAE, said that it would eventually evolve into a platform for trading derivatives, offering companies sophisticated ways of managing their electricity needs. Financial institutions would add liquidity by trading contracts. However, Sodeyama now refuses to discuss the MAE’s problems.

A well-structured market could have helped Brazil avoid the power blackouts and may yet help it overcome the crisis. Eduardo José Bernini, president of the Brazilian subsidiary of Eletricidade de Portugal (EDP), says, “It’s important for the market to [function] because that way more capacity will come when [investors in] merchant plants, which operate to supply the wholesale market and so balance demand, will come to Brazil.” EDP, which has invested $1.3 billion to buy five Brazilian power companies, may delay a further $1 billion in planned investments.

By this February, renewed talks to end the MAE stalemate collapsed when a political crisis in Brasília forced the president of the federal electric holding company, Eletrobrás, and the minister of mines and energy, to quit. In April, Aneel took over control of MAE, announced new rules and streamlined the decision making and the market is now beginning to function. Under the power rationing rules, companies are assigned consumption quotas. Those that consume less than their quota can sell the surplus on the MAE to those that have exceeded their limit. Aneel has gotten the São Paulo Stock Exchange to advise on managing the market.

Contracts representing a total of about 1,300 megawatts are changing hands on the MAE daily at a fixed price designed to reflect the short-term marginal cost of the Brazilian generating system. Bilateral deals struck off the market between supplier and consumer are also meant to be cleared through the MAE. Furnas has even agreed to recognize its debt to the market but an audit determining exactly how much the company owes and haggling over the interest rate to apply to the debt is likely to drag on for a while. LF