Duke wants better prices in new model

US power company Duke Energy's Brazilian unit will try to include changes in the new power sector model so that prices can guarantee returns from recent investments made in privatizations and compete with federally-owned generators, Alcides Casado, commercial director of the company, said Monday. "The new model is a step forward, but needs to be improved in some details, and we are willing to help do that," Casado told journalists. Under the new rules, distributors will have to buy all energy from auctions in regulated pools, unless they are trading excess energy, which can be negotiated in a free-market environment. The new rules do not, however, account for different cost structures. Casado says the price formation by CCEE - the newly-created chamber of energy trading that will take over from the wholesale energy market MAE - is likely to be unfavorable. He says Duke's cost structure still includes the payment of dollar-denominated loans it took to buy up generator Paranapanema in 1999 and does not allow it to compete with energy from old state-controlled plants, whose costs have already been amortized. According to Casado, Duke does not fit in into any of the cases foreseen by the government for energy trading since, along with Tractebel and AES, they are the only companies that bought hydroelectric assets in the power sector privatizations of the 1990s. In 1999, Duke bought the Paranapanema spinoff of state-controlled Cesp, and also won bids to build two thermoelectric projects. A lack of demand following the 2001 and 2002 energy rationing and economic downturn led to a decline in energy prices at MAE, bringing trouble to Duke, and forcing it to suspend investment in the thermoelectric projects. Furthermore, power supply surpluses meant it became difficult to sell energy after contracts for 50% of Paranapanema's capacity expired by 2003. Despite having participated in recent MAE auctions, Duke has not been able to sell any energy, since prices offered are too low. In the November 28 auction, Duke and other generators refused to sell energy at 30 reais/MWh. However, market agents disagree with Duke. "You have to let the market determine prices," said Marcelo Parodi, a partner at Comerc, one of Brazil's largest energy trading companies. "The new model allows for a lot of competition between generators because they can opt to sell in a regulated environment or in bilateral contracts. Privatizations didn't guarantee that prices would stay high." According to Parodi, the average price of 30 reais/MWh reflects the current surplus of energy, but will likely rise as new electricity starts being offered. "The expansion can only be financed at a cost of 120-150 reais/MWh because it has to include financing costs, and this price is what the new capacity will likely go for," he said, referring to government plans to auction 4,500MW of new energy in the fourth quarter of 2004.