Economy

What does Fernández want from electricity distributors?

6th August 2020

By Nicolás Gandini

What does Fernández want from electricity distributors?

Amid escalating attacks from Peronist mayors of the Greater Buenos Aires area against electricity distributor Edesur, President Alberto Fernández recently met with the leaders of the company in his Olivos Presidential Residency. It was Edesur, a company controlled by its Italian counterpart Enel, who asked for the meeting, looking to understand the reasons behind the aggressive behavior it has recently faced.

</p> <p>The meeting was also attended by <a href="https://econojournal.com.ar/2020/02/quien-es-el-principal-candidato-a-conducir-el-enre/">Federico Basualdo</a>, the new head of the National Electricity Regulatory Commission (ENRE), and a former member of it during Cristina Kirchner&#8217;s government. Basualdo made a recommendation to the Executive Branch arguing it should nullify Mauricio Macri’s administration’s Integral Tariff Revision (RTI) for electricity contracts, similar to what is also taking place with <a href="https://econojournal.com.ar/2020/07/enargas-pedira-la-anulacion-de-la-revision-tarifaria-integral-del-gas/">natural gas</a>.</p> <p>President Fernández asked Edesur’s directors for a series of infrastructure projects in Greater Buenos Aires to improve the quality of the service, which has been struggling with outages. The company responded that this could not be done until some public works projects that depend on the municipalities move forward. According to Edesur, the Federal government transferred funds (around 200 million pesos per month) to the mayors during the late days of Cristina Kirchner’s administration, in 2014 and 2015, but the corresponding municipal projects never materialized.</p> <p>The government promised to look into the issue, while Basualdo is continuing an agenda of pending matters with electricity distributing companies. But the real motives driving these discussions are not yet clear. Companies are trying to understand what the ultimate goal of the government is. They want to hear from the horse’s mouth what the government is really aiming at.</p> <h2>Theoretical hikes, but frozen in practice</h2> <p>If Macri’s tariff revision is annulled, distributors will miss out on a complaint amounting to nearly 7 billion pesos, which they have been demanding to recoup. That figure is what electricity companies would have theoretically earned with the current tariff structure had residential rates not been frozen as part of an emergency economic relief package in February 2019.</p> <p>To add to the losses, many homes have also delayed electricity payments since the start of the COVID-19 lockdown, so Edesur and other electricity distributors have responded to the further decline in inflows by delaying their payments to wholesale electricity provider Cammesa — a mixed public/private partnership — even further.</p> <p>Edenor and Edesur managed those debts with electricity wholesalers by aligning them with the debt claims accumulated against the government since the freezing of retail rates last year. “We owe Cammesa around 7 billion, which is exactly what we stopped bringing in since early 2019 when they stopped updating rates,” people linked to Edenor told EconoJournal.</p> <p>The question looking forward is how the country’s biggest electricity distributors will function economically and operationally while the freezing of rates continues. A useful guide could be found looking at what happened during Cristina Kirchner’s second government, when rates were also frozen and authorities looked for alternatives to deal with the situation.</p> <h2>Recent precedents</h2> <p>In May 2013, then Secretary of Energy Daniel Cameron signed a resolution authorizing electricity distributors to compensate part of what they owed to the wholesalers in Cammesa with the income they missed out on due to the <a href="https://gettheessential.com/economy/2019/07/11/subsidies-argentina-macri-electricity-gas-water-public-transport-energy-budget-fiscal-deficit">freezing of rates</a> seen between 2002 and 2012.</p> <p>In practice, the goal of that resolution was to stop Edenor and Edesur from reaching a net negative book value that would have put them close to disappearing according to the current regulatory framework. In order to avoid that, the government decreed a theoretical hike in their income, which in practice was compensated by cancelling part of the debt that the companies had with wholesalers.</p> <p>By May 2015, Cameron’s replacement at the Energy Secretariat, Mariana Matranga, signed another resolution authorizing the Treasury to directly hand in subsidies to Edesur and Edenor to cover for the rising maintenance costs as well as an infrastructure program<strong>. With the companies in the red after almost 15 years of frozen rates amid an inflationary context, the State basically took charge of their expenses. </strong></p> <h2><strong>Doing the numbers</strong></h2> <p>A priori, the regulators at the ENRE do not want to go for any of those alternatives, but the decision will ultimately be in the hands of Alberto Fernández. Apart from cancelling the RTI tariff revision, with the 7 billion pesos this entails, the ENRE is also trying to make companies invest 15 billion in the next six months.</p> <p>But how can all this be financed?</p> <p>The companies have been informally testing the waters for the possibility of exchanging those investments for what they owe to Cammesa, a remake of what happened with the Cristina Kirchner-era resolutions. But the ENRE’s current head Basualdo has opposed the idea, and is aiming at having the company’s stakeholders pay for the investment instead, a request that will be very hard to fulfill without a plan to increase electricity rates on par with inflation in exchange.</p> <p>“If we do this, we would end the year more than 20 billion pesos in debt with Cammesa”, sources near Edenor argue. Edenor has monthly gross billings for around 7.5 billion pesos. The ENRE, which has followed the inflows and outflows of electricity companies very closely since before Basualdo’s arrival, knows that the company’s numbers are too tight to finance the infrastructure program that Basualdo is trying to get out of them.</p> <p>“There are three alternatives. A) The state covers the cost of the infrastructure works to improve the distribution network with subsidies; B) the funds come from a rate hike paid by users; C) that the owners of the electricity distributors put money in the table, but that option is not really viable, as it would make future discussions over rates even more complicated, with the state having to make even higher compensations,” sources in both companies agree.</p> <h2><strong>Political cul-de-sac</strong></h2> <p>When it got to power in October last year, the government hoped it would have enough economic margin to revise gas and electricity rates downwards. It was one of their campaign promises. <strong>After spending a large part of Mauricio Macri’s government criticizing its rate hikes, it had become part of the Frente de Todos’ identity</strong>. But the macroeconomic fragility made those promises sterile, as the downwards spiral of the peso — from around 20 per dollar to 73 (in the official market) in only two years — means the rates are now massively cheaper in real rates, and the tariff hikes applied during Macri’s administration have been diluted.</p> <p>“The situation is complicated because the <em>Frente de Todos</em> militants are demanding a reduction in rates, but the devaluation of the peso and the continued inflation mean that, when the regulators review the companies’ numbers it does not find a lot of room to even continue to extend the freezing without increasing the state subsidies paid to them. The Executive will need to have an internal discussion about how to get out of this political quagmire,” an energy consultant argued.</p> <p>

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Nicolás Gandini

Nicolás Gandini is a journalist specialized in Energy, Oil&Gas and mining. He directs Trama Magazine and the Econojournal news portal.