Energy Information Administration
Introduction
A Historical
Perspective for Argentine Privatization Efforts
Changes in Legislation
and International Agreements
The Industry
Restructuring and Privatization Plan
The Creation of a Competitive
Industry
Resulting Foreign Investment
Endnotes
Argentina's economy of the 1980's was engulfed in numerous problems, some of which could be traced to developments in the 1940's. Economic problems of hyperinflation, low economic growth, and rising national debt were worsened by a deteriorating infrastructure, including the electricity infrastructure. 1 Hyperinflation was dramatically reduced following passage of the Convertibility Law of 1991, which formally initiated then- Economy Minister Cavallo's plan to align Argentina's peso to the U.S. dollar. Additionally, the law required 100-percent backing of the nation's currency by foreign reserves. 2 The decision to link the Argentine peso to the U.S. dollar limited Argentina's available solutions to other problems (for example, low economic growth) by severely limiting discretionary changes in the nation's money supply. Thus, privatization was not only an action that could solve many of Argentina's remaining problems (i.e., rising debt and deteriorating infrastructure) but also an action that was permissible under the new economic plan.
Privatization directly addressed the problem of rising debt by divesting inefficiently-operated assets and companies. In addition, it was expected that the new owners of privatized assets would improve the assets, thereby upgrading Argentina's infrastructure. Further, privatization indirectly addressed the country's economic problems by providing Argentina's treasury with a financial cushion while the fiscal reforms 3 worked through the economy. 4 Privatizations also were a solution for a number of other problems (such as the absence of competition to spur the reduction of production costs) that tend to drain the national treasury, and that often are attributed to publicly-operated companies as opposed to similar privately-operated companies. 5 Finally, as in the Australian state of Victoria and the United Kingdom (UK), a surge in foreign investment accompanied electricity privatization in Argentina.
The Argentine privatization that began in 1992 was the most recent of a series of privatizations. As early as the late 1950's and early 1960's, Argentina privatized some nationalized industries. Again, during the 1970's, another wave of privatization was undertaken, resulting in the sale of 120 companies. 6 Attempts to increase the efficiency of remaining public companies during the late 1970's and 1980's were largely unsuccessful. For example, the 13 largest public companies in Argentina (exclusive of defense) had an operating deficit of $3.8 billion on revenue of $8.7 billion during 1989. During the first half of 1990, the operating deficit grew another 35 percent.
The country's inability to resolve these problems led to the 1992 privatization program. By this time, Argentina's electricity industry " had deteriorated badly and was characterized by severe operational and financial difficulties ." 7 The industry was constantly threatened with the possibility of blackouts, a threat which worsened during periods of relatively little rainfall (such as the summer) because of Argentina's reliance on hydroelectric power generation ( Table 19 ). Electricity was also expensive and often stolen by consumers either through illegal hook-ups or by failure to pay bills. 8 (Argentina's problems were similar to those of other Latin American countries. Despite these problems, the industry achieved a positive growth rate. For example, between 1985 and 1991, net production of electricity increased 19 percent, averaging slightly more than 3 percent annually. However, since privatization began in 1992, the growth rate of electricity production has doubled. Between 1992 and 1995, net production of electricity in Argentina has increased 22 percent, averaging slightly less than 7 percent annually. Argentina's electric industry problems included recurring power outages, substantial and regular unavailability of power generators, and rampant theft of electricity. Given these problems and Argentina's economy-wide problems, the dramatic increase in electricity production that has accompanied privatization demonstrates the extent of its effectiveness.
Argentina's privatization was modeled after Chile's with modifications introduced to correct problems encountered by Chile. Argentina began privatization of its electricity industry more than ten years after Chile privatized its industry. The features of Chile's privatized electricity industry that Argentina adopted included open access to the wholesale electricity market guaranteed by law despite widely dispersed generation plants, and dispatch of electricity based on the production costs of the available generators, with the lowest-cost generation dispatched first. However, Argentina, unlike Chile, required complete separation of transmission from generation and distribution. Other willful differences in the privatizated industries of the two countries include Argentina's restriction that no single generator provide more than ten percent of national generation capacity. 9
In 1991, just prior to the beginning of privatization, Argentina's electricity industry included four federal utilities, 10 one Argentina-Paraguay agency (controlling a large hydroelectric plant owned jointly by the two countries), one Argentina-Uruguay agency (also controlling a large hydroelectric plant owned jointly by the two countries), 19 provincial utilities, and several electricity cooperatives. One of the four federal utilities generated and distributed electricity to the greater Buenos Aires and La Plata area, one served the balance of the country's needs for power generation and transmission, 11 one oversaw the hydroelectric power generators of southern Argentina, 12 and one oversaw nuclear power generation plants. 13 At the time of privatization, the non-nuclear utilities accounted for about 80 percent of the approximately 15,000-megawatt generation capacity of the system. Since 1992, at least some part of each of the first three former federally-owned utilities (the power generation branch of the national atomic energy agency is the lone exception) has been privatized. 14
Changes in Legislation and International Agreements
Several legal changes preceded the most recent round of privatization, which began with the passage of two 1989 laws. The first, the Economic Emergency Law, prohibited the Argentine central bank from financing government deficits and suspended all state subsidies and many incentive programs to mining and manufacturing companies. 15
The second 1989 law was the Administrative Reform Law (Reform Law). 16 The Reform Law, enacted in September 1989, defined the ground rules for investment in formerly federally-owned companies. The ground rules implicitly allowed foreign investment by not expressly prohibiting it. 17 Additionally, the Reform Law gave the Argentina federal government authority to privatize federal companies, including the Buenos Aires electricity company. 18 Although parliamentary approval of privatization sales to domestic companies and/or foreign companies was assured by the Reform Law, further laws to govern the restructuring and privatization of Argentina's different industries were necessary. 19
Although the 1989 laws allowed foreign companies to invest in Argentina's privatizing industries, U.S. companies were given a further incentive to invest by a 1992 trade treaty. The 1992 Bilateral Investment Treaty accorded U.S. companies the privilege of investing in Argentina's private sector at terms at least as favorable as those accorded domestic investors. 20
Also during 1992, an electricity privatization law was passed. Public Law 24,065 (Electric Law), enacted in January 1992, established a legal structure for restructuring and privatizing the electricity industry. The federal government intended for the Electric Law to reduce electricity rates and improve service. The restructuring that preceded privatization was designed to lead to competition between the soon-to-be-privatized electricity companies 21 and was modeled after earlier restructuring by Chile and the price-cap regulation of the United Kingdom. 22 Two further legal changes occurred during 1993. A 1993 amendment to the Foreign Investment Law 23 more explicitly addressed the question of foreign investment. This amendment removed restrictions that applied only to foreign investors, freeing them of the need to receive prior approval for most investment. Later in 1993, the measures of the 1989 Economic Emergency Law, the 1989 Reform Law, and the 1993 amendment to the Foreign Investment Law were combined in an act called Decree 1853, which removed most of the remaining restrictions on foreign investment.
Decree 1853, with few exceptions, allows foreigners to own 100 percent of Argentine companies, and to freely repatriate the profits and capital to their home country 24 . The passage of these laws, amendments, and treaties restructured Argentina's legal system to facilitate the sale of government-owned companies and assets, including those comprising the electricity industry.
The most recent round of privatizations by Argentina was conducted with guidance from the World Bank. 25 Although the World Bank was not directly involved in each individual privatization, Argentina largely adopted the Bank's recommendations in restructuring and privatizing its industries. 26
After the passage of industry-specific privatization laws, the companies to be privatized were restructured so that a competitive industry with multiple companies could be created. Regulatory bodies for the newly-privatized industries also were established. Technical specialists defined and structured the assets into viable, independent business units. Legal advisors created charters for new corporations spun off from the privatized entity and prepared bidding documents, contract terms, and conditions consistent with sale objectives 27 and with the government's intent regarding privatization of the sector. 28
Financial advisors determined necessary investment and price levels for the viability of the privatized entities. Advisors were paid expenses, an agreed-upon fee, and a bonus linked to the price the government received for the privatization(s) on which they worked. 29
Privatized companies were sold through auction. The auction method used is known as the "two-envelope" process. 30 Firms and consortia were prequalified for an intentionally short list of bidders. Those selected as bidders submitted a two-part bid. The first part of the bid was the technical offer, which had to conform with the requirements established by the bidding documents. Firms not meeting the technical requirements were eliminated. The second part of the remaining companies' bids, which contained the financial offers for the assets, were then examined. Winners either offered the highest price for the concession offered or agreed to provide the minimum level of service at the lowest price.
The initial auction usually resulted in privatization of at least a bare majority (51 percent) of the company. During early privatizations of federal electricity assets, the Argentine government retained no more than 39 percent and set aside at least 10 percent for company employees. However, as much as 90 percent of formerly government- owned companies was sold, with the employees receiving 10 percent of the company and the federal government retaining no ownership 31 . At least one 1995 sale resulted in the privatization of 98 percent of a relatively small (448 megawatts) hydroelectric company to an Argentine aluminum manufacturer, with the federal government retaining no ownership and only 2 percent retained for the generator's employees. 32
The shares retained by the Argentine government during the initial sale/privatization could be sold later. Depending on how successfully winners of the initial sale operate the privatized company, the value of the government shares may change. However, sometimes the average price hardly changed. For example, in the case of the privatization of the southern distribution company of greater Buenos Aires, $511 million was paid for a 51-percent share in 1992 by a consortium. 33 The federal government's 39-percent share retained after the initial sale was sold in December 1995 for $390 million 34 , essentially the same per-share price as in the 1992 sale.
Argentina first restructured the federal electricity companies, and the electricity industry in general, and then privatized them. The restructuring began in 1992 with the creation of a national regulatory body, 35 Enre, for the soon-to-be privatized Argentine electricity industry. Also during 1992 a national electricity wholesale market 36 was organized and the privatization of companies began, within the new rules established by the various treaties and privatization laws discussed earlier. The first three of the federally-owned electricity companies that were privatized produced a total of about 80 percent of the nation's supply of electricity. 37 The companies were Segba, Ayee, and Hidronor.
The first of the federal companies privatized was Segba, which served the greater Buenos Aires area, including the city of La Plata 38 . (Buenos Aires accounts for one-third of Argentina's total population.) Before Segba was privatized it was restructured by separating it vertically, and, to a lesser extent, horizontally. First, power generation was separated from transmission and distribution. Then, the constituent power generation facilities were separated from one another resulting in six separate companies ( Figure 14 ).
Power transmission and distribution also were separated. The transmission assets were combined with those of Ayee and Hidronor to create a single high-voltage transmission company and six regional transmission companies ( Figure 15 ). The distribution assets of Segba were separated into three companies, one each serving northern Buenos Aires, southern Buenos Aires, and La Plata ( Figure 16 ).
Privatization of Segba's components began during 1992. The first sales were Segba's power generators. Of these, the first sold was Central Puerto in April 1992. Central Costanera and Central Alto Valle were next, in May and August 1992, respectively. Next to be sold were the distribution companies formed from Segba. The two distribution companies serving northern and southern greater Buenos Aires were sold in September 1992. 39 Subsequently, the remaining three power generation companies, the remaining distribution company, and the high-voltage transmission company, Transener, were privatized.
One interesting aside concerning the privatization of Transener, the high-voltage transmission company, is that National Grid Group, PLC was one of the members of a consortium that purchased a 95-year concession for 65 percent of Transener. 40 National Grid Group, PLC operates the transmission grid in the United Kingdom.
Ayee. The second of the federal electricity companies privatized had generation and transmission assets nationwide (i.e., everywhere but the Buenos Aires/La Plata metropolitan area). 41 Because of the large area for which Ayee was responsible, its restructuring resulted in many more individual companies than the restructuring of Segba, but affected substantially fewer electricity customers in total.
The restructuring of Ayee also separated the stages of power generation and transmission, and divided the generation facilities from one another. A total of 12 generation companies were created from the former federal utility ( Figure 14 ). As previously mentioned, the transmission assets of Ayee were combined with those of Segba and Hidronor, creating a total of six transmission companies ( Figure 15 ) Figure 15). 42
As with Segba, the first assets of Ayee privatized were power generators. The first privatized was the thermal generator Central Termica Guemes in September 1992 43 . Subsequently, nine additional thermal generators and two hydroelectric generators were privatized.
The final privatization of the federal electricity companies involved Hidronor, which oversaw several hydroelectric power generation in southern Argentina. 44 Hidronor's primary assets were its four hydroelectric power facilities, each of which was restructured into a separate company and then privatized ( Figure 15 ). Again, the transmission assets of Hidronor were combined with those of Segba and Ayee ( Figure 15 ).
The first privatized was Central Hidroelectrica Alicura, S.A. in August 1993. Also privatized in August 1993 were Cerros Colorados and Chocon. By December 1993, the fourth and final generation company, del Aguila, was privatized.
Although still not privatized, nuclear electricity assets were restructured in July 1994. The federal government separated the functions of the original nuclear agency into three distinct entities ( Figure 17 ). The first is a company that the Argentine government wishes to privatize. It includes two operational nuclear generation plants, along with one plant still under construction. The second is the nuclear regulatory agency, which will continue to be government-owned and will regulate the individual nuclear powerplants after the plants are privatized. The third is the Argentine federal nuclear research organization, which retained the name of the original nuclear agency and will remain government-owned.
Also still unprivatized are Argentina's two binational hydroelectric generation facilities. One is jointly owned with Uruguay (Salto Grande), and the other is jointly owned with Paraguay and is still under construction (Yacyreta).
Following the onset of privatization of federally-owned electricity companies, restructuring of the provincial electricity companies began. Nearly all distribution assets outside Segba's service area (Buenos Aires and La Plata) belong to these companies. However as of early 1997, relatively few of the 19 provincial companies have been privatized. The most prominent of the exceptions is Eseba, the electricity company of the Buenos Aires province, which has been partially privatized. 45
As with the federal electric companies, Eseba was separated both vertically and horizontally, and two generation companies, one regional transmission company, and three distribution companies were created. However, unlike the federal privatizations, the first provincial companies privatized were distribution companies, not power generators. In April 1997, 95-year concessions for 90 percent of the ownership of each of the three distribution companies 46 were awarded. 47 Since then, privatization temporarily ceased; bids for the two generation companies were unexpectedly low and the governor of Buenos Aires province was advised to delay privatization. At the writing of this report (during the summer of 1997), it is unclear as to whether the privatization of the transmission company, planned for the summer of 1997, 48 will proceed as scheduled.
One apparently unprecedented event occurred during the privatization of Eseba. Among the companies unsuccess- fully attempting to buy the distribution companies of Eseba were both of the privatized former-federal distribution companies of Buenos Aires (Edesur and Edenor) and one of the privatized former-federal power generators, Central Costanera. 49 The Atlantic region concession was awarded for $404 million to a consortium of United Utilities International (a UK company, which is the parent of the regional electric company Norweb), Camuzzi (an Italian natural gas company), and Loma Negra (Argentina's largest cement manufacturer). 50 A con- sortium of AES Corp and Community Energy Alternatives (both U.S. companies) won the concessions for the northern and southern areas of the province, paying $565 million. 51 Apparently, there was little concern with possible problems arising from increasing the concentration of Argentine power distribution, should Edesur or Edenor have won any of the three provincial distribution concessions.
As implied by the foregoing discussion of the restructuring and privatization of Argentina's electricity industry, much has changed in the past five years. Therefore, it is useful to provide an overview the current state of the different sectors of Argentina's electricity industry, beginning with a brief discussion of the federal regulatory body, Enre. 52
The regulatory structure of Argentina's electricity industry was guided by earlier efforts by Chile and the United Kingdom. The federal regulator of Argentine electricity is Enre, which regulates all stages of the electricity industry, but most extensively transmission and distribution. Enre mediates disputes between electricity companies and enforces federal laws, regulations, and terms of concessions. 53 Enre also establishes service standards that distribution companies must meet and sets the maximum price that transmission and distribution companies may charge for their services. (This type of regulation is known as "price-cap regulation." See the section entitled "RPI-X: Price Caps Versus Rate of Return Regulation" in Chapter 2). Enre oversees the operator of the wholesale electricity market, Cammesa, and the generation companies. However, the generation companies are not subjected to price-cap regulation.
The post-privatization Argentine electricity industry consists of conventional power generation, transmission, distribution, and large users. Each of these is discussed in the following sections.
Power Generation. Conventional electricity (thermal and hydroelectric) facilities were sold separately, essentially making each privatized generation facility an independent power producer. The thermal generation facilities were sold outright, while concessions (averaging 30 years) were awarded for the hydroelectric plants 54 . The majority of Argentina's privatized generation capacity was purchased by foreign companies. Because foreign companies generally showed little interest in small capacity generation facilities, these privatized facilities tended to be exclusively owned by domestic companies. Also, these domestic companies tended not to purchase generation facilities in order to sell electricity in the national wholesale market. Rather, the generation facilities were intended to be captive facilities, purchased to provide for the companies' own electricity needs. For example, two Argentine companies, a paper manufacturer and a steel producer, bought a 20-megawatt oil and gas-fired generating plant for $8.5 million. 55
The post-privatization Argentine power generation industry (including both conventional and non- conventional power facilities) is composed of independent, largely unregulated power generation companies. The companies are essentially unregulated because electric power generation is considered a competitive market. The nearly 40 generating companies operating in Argentina ( Figure 14 ) are assured by the national electricity regulatory body (Enre) of having open and equal access to the national grid 56 and receive unregulated prices (Argentine electricity prices are discussed below). Nonetheless, some restrictions have been placed on power generators. In order to avoid market concentration difficulties, generation companies are legally restricted to a market share of 10 percent or less of the national electricity sales volume. 57 They also are prohibited from owning majority shares in electricity transmission facilities. 58
About ten power generators (including both conventional and non-conventional) are still owned by the federal or provincial governments (in addition to those under construction or in the planning stage), either because efforts to privatize have not begun or because efforts are still unsuccessful. Nuclear power plants and the binational hydroelectric power generation facilities have been more problematic. (See the boxes entitled " Privatization of Argentine Nuclear Generation: The Long Good- bye" and " Privatization of Binational Generation: Twice the Usual Number of Headaches" for discussions of each.)
Even though still state-owned, the companies yet to be privatized effectively act as independent power producers, selling the power they generate through the wholesale electricity market. (Any power they generate is always dispatched.) Additional power demand is met by dispatching power from thermal power generators and cogenerators, in reverse order of their marginal cost of generation.
Generation companies receive income from providing actual electricity and reserve capacity to the transmission network. All generators whose power is dispatched by Cammesa receive a price equal to the marginal cost of the last generator whose power is dispatched. Generators whose production costs are too high to be dispatched by Cammesa receive a payment for providing the system with reserve power. The payment is based on the power they agree to provide, effectively creating a price floor for generators. However, the reserve payment is sufficiently low that generators have a dual incentive to reduce their costs --foremost, to have their electricity dispatched and, second, to increase the difference between electricity production costs and revenues from sales.
Wholesale Electricity Market. The wholesale electricity market (also known as a power pool) has both a supply side and a demand side. The supply side of the wholesale electricity market is composed of independent power producers, privatized generators, generators still owned by the federal government (including the two nuclear power plants), the two binational hydroelectric power plants (also still not privatized), and foreign producers selling imported electricity. The demand side of the wholesale market is composed of distribution companies, large users, and foreign consumers purchasing exported electricity.
The interaction of the supply and demand sides of the wholesale market largely determines wholesale prices for electricity. Additionally, a fixed charge is added to all of the market-determined prices to cover payments made by Cammesa to power generators providing reserve capacity to the electricity grid. Three kinds of wholesale electricity prices exist in the Argentine electricity industry: contractual prices, seasonal prices, and spot prices. Of these, seasonal and spot prices are determined directly in the wholesale market, while contractual prices are affected indirectly by the wholesale market. (Prices are discussed in a separate section below.)
Use of the wholesale electricity market has increased substantially since its creation in 1992. For example, the number of exchanges taking place in the market has increased from approximately 20 (between February and April 1994) to around 450 (between November 1995 and January 1996) 59 . The number of participants in the wholesale market has demonstrated similar growth over the same period, particularly by large users, as total participants increased from about 50 (between February and April 1994) to more than 500 (between November 1995 and January 1996). 60
The wholesale market is administered by Cammesa, a nonprofit, independent operating agency jointly owned wholesale by the government and the power generation companies. Cammesa is directed by a board composed of two representatives from each of the following: Argentina's federal government, power generators, transmission companies, distribution companies, and large users. The board of directors makes decisions based on simple majority rule. (However, the president of the board of directors is the Secretary of Energy, who has veto power over board decisions and apparently can be overridden only by the President of Argentina.) Cammesa has three primary tasks: dispatching power; determining the fixed charges and other fixed fees added to spot, seasonal, and contractual prices to cover the full costs of transmission; and ensuring that the power system maintains adequate reserve capacity.
Power is dispatched to the national electricity grid by Cammesa. Cammesa determines the cost of generation for each producer and then dispatches electricity to the transmission grid (discussed in the following section), sending the cheapest power first until current demand has been satisfied. 61 The price that is paid to each generator is determined largely by the highest cost producer whose power is dispatched . 62 (This arrangement is similar to the marginal cost pricing systems employed in the United Kingdom and Australia, discussed in Chapters 2 and 3 of this report.) Revenues to fund Cammesa's operations may be no more than 3.5 percent of the gross revenues generated by the wholesale electricity market.
Power Transmission. Although the wholesale market allows buyers and sellers of electricity to interact and determine prices, it is the transmission network of Argentina that physically links the buyers and sellers of electricity to one another, delivering power to distribution companies and to large industrial users. The transmission network has two parts, one high-voltage (500 kilovolts) transmission system, and six lower-voltage (220 kilovolts) regional transmission systems.
As in the United Kingdom and Australia, electricity transmission has been defined by Enre (the national electricity regulator) as a natural monopoly and is closely regulated. Firms may enter the industry only after successfully bidding for a fixed-duration concession for a particular area and may charge no more than regulated prices for their services. Concessionaires are required to allow open access to their transmission network to third parties.
Transmission companies are not allowed to buy or sell electricity. Instead, their revenues come exclusively from the regulated prices they receive. The price is based on the availability (providing a fixed source of income) and the use (providing a variable source of income) of their network assets. 63 The rate at which they are paid is capped by the federal electricity regulatory body, providing an incentive for Argentine transmission companies to reduce their costs. 64 (Price-cap regulation also is employed in the United Kingdom and Australia.)
The lower-voltage, regional transmission systems transmit power to and from the high-voltage transmission system. Transener 65 owns and operates the high-voltage segment of the Argentine transmission network (in addition to one of the lower-voltage, regional systems). Transener serves a total 14 of Argentina's 24 provinces, possibly carrying 90 percent of Argentina's transmitted power. 66 Thus, Transener is considered the primary electricity transmission company in Argentina.
Among the six transmission companies, more than half have been at least partially privatized. The privatized companies are Distro Cuyo, Transnea, Transener, and Transpa. 67 The creation of a seventh private regional company was approved by the Argentine national electricity regulatory body during 1996. The company will construct, operate, and maintain transmission lines and transformer stations associated with the binational Yacyreta hydroelectric plant. 68 Construction of two additional transmission lines is under consideration and bids have been solicited. One will connect Salto to the Chilean border 69 and the other will add a fourth transmission line from Patagonia to Buenos Aires. 70
Power Distribution. The final stage through which electricity passes between creation and use is the distribution stage. In Argentina electricity distribution is defined as a natural monopoly within the geographic area for which a concession is awarded. Firms may enter distribution only after successfully bidding for a concession. Distribution concessions are 95 years in length. 71 As with transmission companies, distribution companies have regulated maximum rates that they may charge for their services and must allow open access to their distribution network to third parties. 72
Distribution companies provide power to their end users at rates that are capped by regulators (similar to provisions in the United Kingdom and Australia, discussed in the section entitled "RPI-X: Price Caps Versus Rate-of- Return Regulation" in Chapter 2). Incentives to reduce operating costs are provided by price-cap regulation, and the benefits of cost reductions are received by the regulated company and its stockholders. Customers, too, eventually save from lower operating costs because the cap is reset every five to eight years. 73
Distribution assets formerly owned by federal electric utility companies generally were privatized or transferred to the provinces, 74 which have begun to privatize the distribution operations. Several distribution companies were created by the restructuring. The two largest, which serve greater Buenos Aires, were the first privatized.
Large Users. Large users (who consume at least 2 megawatt hours of electricity annually) may choose to be supplied by the distribution company serving their area or purchase electricity directly from a generation company. Large users are in one of two categories: major, which consume at least 4,380 megawatt hours of electricity annually, and minor, which consume less than 4,380 megawatt hours annually.
Large users choosing to be supplied directly by a generation company pay a contracted price determined through bilateral negotiation with a generation company. Large users who instead choose to be supplied by a distribution company pay the same rate charged any other customer of the distribution company. Large users additionally are permitted to buy power directly from the wholesale electricity market, paying the spot price. 75 The number of large users active in the wholesale electricity market has increased from about 5 in 1993 (none during 1992) to more than 200 in early 1996. 76
Contractual Prices. Contractual prices are negotiated between generation companies and distribution companies, or between generation companies and large users. The length of the contracts is typically one year. These prices are largely unregulated. Hydroelectric generators may contract only up to 70 percent of their anticipated monthly production. (Note that weather conditions and other factors may dramatically affect water levels and, therefore, the generation capacity of hydroelectric generators.) Similarly, thermal generators may not contract for more delivered electricity than their net generation capacity (some electricity use occurs at the generation facility) 77 .
Seasonal Prices. Seasonal prices are determined by Cammesa in the seasonal component of the wholesale electricity market and officially maintained for 6-month periods, beginning May 1 and November 1 of each year. The seasons are based on water level 78 and generally correspond to winter/spring and summer/fall, respectively. Every 3 months Cammesa receives updates to the information it uses to determine seasonal prices and may then revise the current seasonal price. 79 Thus, seasonal prices are effectively 3-month prices.
Cammesa sets seasonal prices by using information provided by distribution, transmission, and generation companies. The information includes demand forecasts for typical days, unavailable reactive power, and weekly load curves from distribution companies; availability, restrictions, reactive power equipment unavailable, and net equipment information from transmission companies; capacity, efficiency, planned maintenance, internal electricity consumption, and availability from all generation companies; fuel use and prices from thermal generation companies; and historical and predicted water flows and other characteristics of the reservoirs from hydroelectric generation companies. 80
The seasonal price is paid by distribution companies purchasing power in excess of the amount they had contracted to purchase from power generators. Seasonal prices during the winter/spring presume that hydroelectric generators are the primary source of power and have lower seasonal prices than the summer/fall period. Alternatively, seasonal prices during the summer/fall presume that thermal generators are the largest source of power and have relatively higher prices. 81
Spot Prices. Spot prices are determined by the interaction of buyers and sellers in the spot component of the wholesale electricity market. Spot prices vary hourly. 82 The buyers who pay the spot price include generators and large users. Generators buy electricity they contractually agreed to provide in excess of actual generation. Additionally, large users who contracted for too little power to cover their current need may purchase additional electricity in the wholesale market, paying the spot price.
Sellers receive the spot price and may include distribution companies, generators, and large users. Distribution companies contracting for more electricity than actually purchased by their customers may sell their excess electricity in the spot market. Similarly, generators may sell electricity produced beyond their contractual obligations (to either distribution companies or large users) in the spot market. Large users, too, may sell any electricity they have contracted to buy that exceeds their current use, receiving the spot price.
Spot prices received are adjusted through application of fixed charges. These charges are assessed by Cammesa and are to cover the costs of ensuring some minimum level of reserve capacity and coverage of transmission and other losses.
Reserve capacity provided by thermal generators is based on the level of undispatched, but available, capacity they provide. Hydroelectric generators are paid on the basis of the amount of power generated. Reserve capacity is assigned on the basis of least-cost generation.
Transmission loss charges are based on the physical distance of the electricity seller from Buenos Aires. The greater the distance, the more the price received is discounted to cover transmission losses. 83
As of May 1996, the base price paid for electricity dispatched by Cammesa was $5 per megawatt hour and the fee paid for reserve capacity also was $5 per megawatt hour, summing to $10 per megawatt hour. 84
Argentina created a wholesale market for bulk electricity sales in which prices are based largely on the interaction of the two sides of the market, sellers and buyers. The wholesale market is overseen by Cammesa, while Enre, the federal electricity regulatory agency, oversees the electricity industry as a whole. Enre established regulations mandating services that distribution companies must provide to end users and instituted price-cap regulation of transmission and distribution. Price-cap regulation is not applied to generation. The Argentine federal government continues to engage in power planning, granting concessions, and setting overall electricity policies. Since privatization, many noticeable changes have marked the Argentine electricity industry. The changes include lower prices, increased reliability, lower employment, higher productivity, and increased foreign investment.
Following privatization, Argentine wholesale electricity prices fell about 60 percent from the pre-privatization level of $60 per megawatt hour in August 1992. 85 As of 1997, Argentina's wholesale power rates stabilized at about 40 percent below the pre-privatization level. However, this occurred only after a period of adjustment, during which wholesale rates fell almost to zero. 86
Increased reliability of electricity service has been substantial in some cases. For example, the northern Buenos Aires distribution company reduced outages from 22 hours per year in 1992 to 6 hours per year in 1995. Meanwhile, the southern Buenos Aires distribution company cut outages from 39 hours per year to 6 hours per year over the same period. 87
Reliability also has been increased through the introduction of improved technology. For example, following privatization, incumbent generating plants were retrofitted with power system stabilizers. Once the stabilizers were in place, a system to automatically disconnect generating capacity could be designed. Transmission faults were then less likely to cause widespread outages because the automatic system disconnects as little generating capacity as possible, given the particular transmission fault. 88
Increased productivity did not occur overnight in Argentina. Many newly-privatized companies struggled to institute changes and make improvements. For example, the southern distribution company of greater Buenos Aires, one of the first distribution companies privatized, lost $150 million in the first 16 months after privatization. A concerted effort to discover and eliminate illegal connections, through which much electricity was stolen from the company, was eventually successful and the amount of Argentine electricity stolen through illegal connections was substantially reduced. This reduction at least partially accounts for an approximate profit of $60 million during 1995. 89
As productivity at the generation stage was increased, overall efficiency eventually was increased. For example, 30 percent of the capacity of Costanera, a generator near Buenos Aires, typically was available before privatization. By 1994, availability was increased to 75 percent. Similarly, the electric distribution company serving the city of La Plata increased its customer base from 228,000 to 270,000 customers between 1992 and 1995, even while company employment fell. 90
Electricity service to Buenos Aires will be increased with the construction of a new $250 million transmission line from Patagonia to Buenos Aires. The transmission line will be commissioned by a consortium 91 of eight privatized electricity generation companies. The companies are legally prohibited from holding a majority share in the planned transmission line, but will fund the construction and award the concession. The consortium also plans a $25-million capacitor project, which is expected to substantially increase the electricity supply to the greater Buenos Aires area from 2,700 megawatts to 4,600 over a three-year period. The consortium members currently produce 31 percent of Argentina's total electricity supply. 92
With increased productivity, unemployment has become a problem as individual electricity companies in Argentina (and Chile) have reduced their total employment by as much as 40 percent since privatization. 93 Further, rising economy-wide unemployment prompted the 1994 signing of an agreement between the Argentine federal government, business organizations, and labor unions to restrain unemployment. This agreement includes the creation of training programs for displaced workers. 94
Increasing foreign investment was one of the primary reasons the Argentine government undertook the 1992 round of general privatization. The government has indicated satisfaction with the level of foreign investment since privatization began ( Figure 18 ). For example, the private owners of the northern distribution company of greater Buenos Aires made capital investments of about $380 million between September 1992 and 1995. Between 1995 and 2000 an additional total investment of $500 million is planned for northern Buenos Aires. 95 Anticipated economy-wide electricity investment between 1996 and 2001 is $7 billion, most of which is attributed to private investors. 96 The primary purpose of at least some of the anticipated investment is to improve customer service.
Debt Reduction. Privatization has reduced Argentina's federal government debt in two ways. First, federal assets were sold and the proceeds were used to retire debt. Privatization resulted in payments to the Argentine federal government of $10 billion. 97 Second, the losses generated by many federal companies were eliminated by selling the companies, thus ending the drain on the federal treasury as additional savings from reduced government subsidies to public companies were anticipated. 98
There was a concern that some Argentine federal electricity companies might have drawn unacceptably low bids. As a result, in order to ensure their sale, the Argentine federal government agreed to retain some of these companies' liabilities and debt. (This type of partial assumption of the debt of federal companies in order to ensure their sale was applied to federal assets of many Argentine industries, not just the electricity industry.) The assumption of these debts (essentially, privatization-related expenses) necessarily contributed to Argentina's increase in publicly-guaranteed foreign debt (from $47.6 billion in 1991 to an estimated $62.2 billion in 1995 99 ) and could lead to the conclusion that privatization worsened Argentina's external debt. However, in reality, Argentina's external debt may have increased substantially more in the absence of their assumption of this debt, due to the anticipated continued losses and debts of the federal companies.
The anticipated long-term effect of privatizing former federal companies in Argentina is reduced federal debt. Between 1990 and 1994, Argentine government foreign debt was reduced by $15 billion as a result of proceeds from direct sale of federal assets. 100 An additional $2.7 billion of debt was transferred (via privatization) by the federal government to the new private owners of the former-federal companies. 101 Further, the ratio of debt interest payments to exports has fallen from nearly 35 percent in 1991 to an estimate of slightly less than 17 percent in 1995. 102
Privatization proceeds have been considerable. As a result, the Argentine federal government has been able to substantially reduce domestic borrowing. Other privatization funds are earmarked for the repurchase of government bonds, which also will reduce federal debt.
Employment Reduction. Federal employment in Argentine industries selected for privatization was anticipated, by the completion of privatization, to fall from a pre-1990-level of 222,000 employees to less than 42,000 employees. About 66,000 of those losing their public jobs were expected to be hired by the new private firms and another 19,000 of these employees were expected to retire. 103 At the same time, slowed economic growth and restructuring of the economy contributed to a soaring Argentine unemployment rate. The unemployment rate increased from 6.8 percent in 1991 to about 13.5 percent in 1995 104 and, through May 1997, was about 17 percent. 105, 106 However, as of 1993, opposition by organized labor to such traumatic change was limited and was more than offset by public approval and by increased opportunity in the private sector. 107
Few data are available concerning actual employment changes in privatized companies resulting from Argentina's massive privatization program. It is unclear how closely actual employment changes in the electricity industry have reflected anticipated reductions.
Improved Economic Environment. By almost every measure, Argentina's economy has improved since the 1992 privatization efforts began. One of the first signs of the country's improvement occurred in December 1992, when it was allowed to enter into a credit-enhancing international debt agreement with the United States (generally known as "Brady debt"). 108 Inflation (measured by the wholesale price index) fell from an annual rate of 1,607 percent in 1990 to 5.9 percent in 1994. 109 Real investment grew at an annual rate of approximately 20 percent between 1991 and 1994. 110 Economic growth (measured by the change in real Gross Domestic Product) varied between 5.8 and 8.7 percent between 1991 and 1994, 111 fell to about 1 percent during 1995, 112 but rebounded (by May 1997) to reach a 1997 annualized rate of about 8 percent. 113
The interaction of supply and demand for electricity will determine the price in the newly-privatized environment. Increased efficiency is expected to reduce costs and put downward pressure on prices. However, real prices after privatization may increase as elimination of the use of government subsidies and ceilings that historically kept prices low may raise some prices. Further, elimination of previously existing cross-subsidies in which rural and large industrial customers subsidized urban residential customers 114 may also lead to increases in some prices paid for electricity.
Foreign investment in all Argentine industry has increased, 115 providing capital needed for the introduction and application of new technologies. According to the Inter-American Development Bank, net capital inflows to Argentina increased each year between 1991 and 1994, reaching almost $11 billion in 1994 (with the private sector receiving almost $9 billion). 116
According to recent information, the largest concentration of private firms in Argentine electricity is in the area of power generation, the first segment of Argentina's electricity industry privatized ( Figure 19 ). However, despite the substantially larger number of privatizations in power generation, electricity distribution based on sales is almost as heavily controlled by private firms ( Figure 20 ).
Nearly all the companies that are investing in Argentina's electricity industry are from the United States or Chile.
The reduced risk associated with the political climate of Argentina, the apparent dedication of the current government to its program of macroeconomic stability, and the large growth rates forecast for Latin America (and for Argentina, in particular) have attracted many companies to participate in the privatization of Argentina's electricity industry. For example, when 90 percent of the Buenos Aires provincial electricity company was privatized during 1996, sixteen consortia made offers. 117 (A listing of foreign companies with current investments in Argentine electricity is provided in Table 20. (See Appendix Table C1 for more information.)
Private companies have invested in the privatization of Argentina's electricity industry for several reasons. First, there are growth opportunities (the U.S. electricity industry is forecast to grow two percent between 1994 and 2000, while Argentina's electricity industry has been forecast to expand at an average annual rate of 8 percent for the same period). 118 Second, U.S. companies may see Argentina as a laboratory for learning how to operate in a deregulated market and hope to transfer the knowledge gained to the soon-to-be deregulated U.S. electricity industry. 119 Third, companies have invested in Argentina's privatized electricity industry in order to be positioned to subsequently expand into investments in the privatized electricity industries of other Latin American countries. 120 Fourth, some companies have developed specialities in electricity operations (e.g., power generation) and see opportunities to apply those specialities in Argentina. 121
However, some companies investing in Argentine electricity have made mistakes. Companies have made investments in properties that later were sold. There also have been cases where, by substantially outbidding other companies, buyers have in fact overpaid for properties . 122 Some companies have reacted to mistakes by others by exercising caution. 123 Others have decided to refocus their investments to a more narrow range of activities.
Many of the companies investing in Argentina's privatized electricity industry are active in power generation in their own country. 124 For example, privatization in Argentina has enabled several of Chile's electricity firms to enter power generation in Argentina.
A network of Latin American transcontinental gas pipelines (permitting the conversion of coal-fired to natural gas-fired electricity plants) is well under way. Some of the firms active in the expansion of the natural gas pipeline network also are electricity companies. Examples include Chilgener 125 and CMS Energy (a U.S. company). 126 (See the box entitled "Latin America's New Natural Gas Pipeline Network" for a discussion of the relationship between natural gas pipeline investment and electricity investment in Latin America.)
The success of the network of gas pipelines may enhance the probability of a Latin American electricity grid. Argentina's electricity privatization has further spurred speculation that the natural gas network under construction will be formally extended, creating a regional electricity/natural gas network. In fact, the chairman of one of these Chilean electricity firms, Chilgener, has publicly speculated that within ten years an interconnected grid for the seven Southern Cone countries (Argentina, Bolivia, Brazil, Chile, Paraguay, Peru, and Uruguay)--with a single multinational regulator ensuring efficient use of capacity--will exist. Such an extraordinary innovation would substantially advance Latin America's standing in world markets.
Endnotes Appendix A Table of contents
