Political Economy of Energy in the Southern Cone 0275978303, 9780275978303

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POLITICAL ECONOMY OF ENERGY IN THE SOUTHERN CONE

Anil Hira

PRAEGER

Political Economy of Energy in the Southern Cone

POLITICAL ECONOMY OF ENERGY IN THE SOUTHERN CONE Anil Hira

Library of Congress Cataloging-in-Publication Data Hira, Anil. Political economy of energy in the Southern Cone / Anil Hira. p. cm. Includes bibliographical references and index. ISBN 0-275-97830-3 (alk. paper) 1. Energy industries—South America. 2. Energy policy—South America—Case studies. I. Title. HD9502.S58 H57 2003 333.79⬘098—dc21 2002029762 British Library Cataloguing in Publication Data is available. Copyright 䉷 2003 by Anil Hira All rights reserved. No portion of this book may be reproduced, by any process or technique, without the express written consent of the publisher. Library of Congress Catalog Card Number: 2002029762 ISBN: 0-275-97830-3 First published in 2003 Praeger Publishers, 88 Post Road West, Westport, CT 06881 An imprint of Greenwood Publishing Group, Inc. www.praeger.com Printed in the United States of America The paper used in this book complies with the Permanent Paper Standard issued by the National Information Standards Organization (Z39.48-1984). 10

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This book is dedicated to Gerardo Otero and Patricia Ordo´n˜ez, who gave me a shot.

Contents

1. 2.

3. 4. 5.

Tables and Figures

ix

Acknowledgments

xi

The New Terrain of State Autonomy: Regulatory Independence from Globalization

1

A Political Economy Framework for Sectoral Liberalization and Integration: The Case of MERCOSUR Electricity Markets

17

Evaluating Market Liberalization: Electricity and Gas in the Southern Cone

41

The Political Economy of Sectoral Integration: The Case of MERCOSUR Electricity Markets

77

Conclusion: Solving Electricity and Other Regulatory Policy Problems and Utilizing Regulatory State Autonomy

93

Selected Bibliography

101

Index

113

Tables and Figures

TABLES 3.1 3.2 3.3

4.1

Summary Evaluation of SoCo Electricity Systems Examples of Market Share Concentration in SoCo Energy Markets Comparative Electricity Prices for SoCo Countries

60 61

3.3a Wholesale Prices 3.3b Retail Prices

62 63

3.3c Retail Price Premiums Energy Profile of the Southern Cone, 1997

64 84

FIG URES 2.1 2.2

Political Economy of Deregulation New Dynamics of Electricity Integration

31 36

Acknowledgments

This book comes out of a very interesting education I received while at the U.S. International Trade Commission (USITC) from Richard Brown on sectoral analysis. Mr. Brown gave me a chance to learn about the importance of microlevel analysis during fact-finding trips to South America in 1999. While our express purpose was to understand existing regulatory frameworks for U.S. trade negotiators, as a political economist, I was struck by the bigger picture that emerged about the politics behind Southern Cone (SoCo) energy policies, and the lessons for development strategy. Many of these conversations began with my partner at USITC, Mike Nunes. My brother, Ron Hira, was vital to explaining in layman’s terms how electricity worked. I was fortunate to arrive at Simon Fraser University (SFU) in 2000, and decided to begin work on getting research funding to explore the bigger picture more fully. In these initial stages, my colleagues at SFU were instrumental in guiding the research and helping me to gain funding. Mike Howlett, Maureen Covell, Ted Cohn, Dan Cohn, and Stephen McBride all gave useful comments. Gerardo Otero and Paul Warwick were particularly helpful in terms of the grant application. SFU has supported me throughout the two years of the project, with a Presidential Research Grant and a small Social Sciences and Humanities Research Council (SSHRC) grant, funded by the government of Canada. The field research was made pos-

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Acknowledgments

sible by the extended help of Comisio´n de Integracion de Electricidad Regional (CIER), the Organizacio´n Latinoamericana de Energia (OLADE), the regulatory agencies of Brazil, Chile, and Argentina, and a number of companies and nonprofit organizations who were kind enough to provide interviews. Maria Fernandez Va´zquez, Hugo L. Rinco´n Sergent, Ester Fandin˜o, and Antonio Vignolo of CIER were all particularly helpful and encouraging. Antonio Vignolo and Franz Brandenberger of the Canadian Consulate in Brazil were invaluable in helping me to set up interviews. Luis G. Pedraza of the Universidad de Buenos Aires very kindly invited me to an important energy conference in Argentina on Mercado Comun del Sur (MERCOSUR) integration. Grupo Energia of the Universidad Federal do Rio de Janeiro (UFRJ), particularly Luciano Losekann, Edmar de Almeida, and Adilson de Olveira, helped me immensely with the Brazilian case. For the purposes of gaining interviewees’ confidence, I agreed to maintain all materials confidential. However, I have given a list of some of the organizations with whom I spoke in the bibliography. The manuscript benefited from another round of feedback by Katie Lavelle, Carlos Rufin, and John Richards. Ron Hira, Karl Froschauer, and Pierre Olivier-Pineau provided a rare and well-appreciated dedication in their detailed comments. Jim Sabin and Greenwood Press have been key supporters of my career; I hope I will do them justice. The text, however, is all mine, for better or worse. Last but certainly not least, I would like to thank my family for their warmth, support, and understanding through my many projects.

CHAPTER ONE

The New Terrain of State Autonomy Regulatory Independence from Globalization

IN TRODUCT I O N This book seeks to move beyond our superficial conversations and knowledge about the economic effects of globalization. For those of us interested in the relations between globalization and increasing inequality in the world, the picture can look alternately bright or very grim, depending on whether we believe free markets lead to equitable growth. We color in and create shape for the black-and-white cartoon of this academic and policy conversation by using a multilevel description and analysis of SoCo energy markets.1 By Southern Cone (SoCo) we refer to the countries of the MERCOSUR, namely Argentina, Bolivia, Brazil, Chile, Paraguay, and Uruguay. We first describe the context of the problem of how developing country states can create independent policies in a period of seemingly overwhelming external and internal pressures. We then tackle the question of how to evaluate deregulation, privatization, and integration, the main components of globalization in terms of economic policy. We evaluate the dynamics and outcomes of globalization by using regulatory policy as our lens. To get to a real evaluation of the effects of globalization on the states, consumers, and corporations,

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Political Economy of Energy in the Southern Cone

we need a microlevel comparison of national case studies.2 Thus, the ultimate foundation of our enquiry is a detailed political economy study and evaluation of the energy sector in the Southern Cone. In the process, we will shed light on energy issues as well as on globalization. The differences in energy policy outcomes will reveal the myriad ways that developing countries can respond to globalization forces. As Karl Polanyi pointed out many years ago in The Great Transformation, economic policies are a reflection not only of national and international interests, but also of social consensus, or lack thereof, on the principles, norms, and values of market exchange. State autonomy is the key concept that should be considered in terms of the polemic about globalization and how a national consensus can be achieved. State autonomy refers to the degree of insulation that a state has in regard to domestic political forces.3 Insulation is important in the sense that the state must play a role in forming a national economic strategy, one that is not susceptible to hijacking by special interests. For our purposes, we should refer to state autonomy as insulation not only from domestic, but also international forces.4 Developing countries seem to find themselves mired in a cycle of debt, which seems to constrain their possibilities for deviating from the macroeconomic and free trade norms that constitute the key parts of the hegemonic neoliberal discourse. In other words, their state autonomy seems almost nil at times. Moreover, neoliberalism in Latin America has brought not only a control of inflation, but also an extremely volatile growth rate and a growing relative inequality,5 both of which beg for an alternative paradigm. In a sense, the answer to this question seems almost moot, since there is no alternative prescription as of yet to basic neoliberal policies.6 Indeed, both the consensus on those policies and the internal and external conditions that support movement toward freer markets seem stronger than ever among decision makers and the policy networks behind them. This has led some observers to applaud and others to decry the end of a government role in the economy internationally, including the protection of industries and key jobs and the demise of the social welfare state. In this book, we will move beyond these false prophesies and look more carefully at what is happening in the newly liberalized economies of the developing world. We find that instead of a world of uniformity and overall weakness, there is an incredible richness of variety in the

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3

ways that the new political economy arrangements are working themselves out within neoliberalism. Using case studies of the electricity and gas industries in the Southern Cone, we blow away the myth that the state can no longer intervene in the economy for social or national economic protection in order to stay within neoliberal mandates. We also extinguish the antiglobalization myth that all deregulation and integration of markets lead developing countries to a hapless state of economic dependency at the hands of multinational corporations. Rather, we reveal that developing countries are not helpless victims of some new global order. They continue, perhaps more than ever, to actively shape and influence economic outcomes through a variety of national policies, particularly regulation.7 This provides the beginning of a blueprint for national economic success in the new age of globalization.8 TH E NEW CO NT EX T OF G L OB A L I Z AT I ON : ECON O MI C LIBER A L I Z AT I ON A N D A N E W ROLE FO R THE ST AT E Intr od u cti o n Globalization has thrown the state into confusion: the state has shown itself incapable of telling us if globalization constitutes something good, bad, dangerous or advantageous, even though the demand for meaning is very strong. —Zaki Laı¨di9

At this point in history, we find ourselves in very confusing and unknown territory as a world. In political life, the end of the Cold War ended the clarity of the ideological, political, and military struggle of the bipolar world. In economic life, there has been a sweep of consensus and policy transformation toward neoliberal economics. In social life, there is an increasing sense of anxiety and dislocation in a variety of manners, including development of the Internet, massive legal and illegal migrations of populations, and loss of the traditional local and national shaping of identities as a cosmopolitan population develops.10 “Globalization” is the broad term used to capture these changes, and it implies the development of tighter networks, links, and dependencies among individuals, groups, and locations.11

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Getting beyond the bravado of some of the recent literature that claims to provide neat answers12 leaves the social scientist with the inescapable conclusion that most colleagues are just as much in the dark as the rest of the population in regard to globalization. Since globalization is itself undefined, it has been used to describe everything from the implications of Internet use to the growth of terrorist networks. From the point of view of a developing country’s economic choices, we can classify the burgeoning globalization literature along clear dialectical lines.13 There is a general axis of discourse, with the views of global optimists arguing with those of global pessimists. The various reactions to globalization include proposals about the emergence of a new globalized society, ideas about a “new information age,”14 and antiglobalization protests at recent international trade meetings, that see insidious and harmful forces at work. Internationally, there does seem to be a convergence along political, economic, and social lines. In political terms, the end of the Cold War means the dominance of the United States. The dominance of the ideals of democracy and market capitalism are backed by the dominance of the United States not only in military terms, but also in terms of international institutions. The idea of a Pax Americana means, in practice, that the United States is able to use international institutions, such as the United Nations and the World Bank, as instruments to maintain the new status quo through, for example, “peacekeeping” and controlling economic flows of capital. In economic terms, free market capitalism is dominated by the need for foreign investment and access to the U.S. market. In social terms, finally, there is a concentration of power in that most cultural production is masterminded in Hollywood and other media centers in the United States. There are two interpretations of the situation that developing countries find themselves in. Global optimists, such as Francis Fukuyama, see the triumph of Western values as the “end of history,” in the sense that there is a wide consensus that democracy and markets work best. Some members of this camp perceive the United States as playing an important promotional role by spreading democratic and human rights values and being a stabilizing force in the economy.15 Optimists see the creation of the free trade agreements and the global capital market as a positive development for international growth, even if it requires greater international coordination. Global pessimists, on the other hand, believe

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the claims of the spread of democratic values and human rights ring hollow in the face of the growing unbridled power of corporations and the increasing income inequality internationally and domestically. Pessimists see the possibilities for international corporate collusion, rather than decentralized competition. They view the role and growing scope of multinational corporations and the increase in international trade agreements as threats to the social welfare states in the First World and limits to state actions to improve inequality or insulate local populations in the developing world.16 The principal actors in these visions of globalization tend to be three basic forms of organization: the corporation, the social movement and nongovernmental organization (NGO), and the state. Corporate strategy that “optimizes” the new opportunities and costs of a global age occupies a large niche of the globalization analysis market. Corporations are also viewed as enemy number one in terms of their supposed ability to work outside of national rules and to reduce state welfare protection through threatening competition. Corporations are viewed as liberated from the state, leading to social efficiency, by the pro-forces, and as working handin-hand with the state, in a form of international greed and concentration of power, by the anti-forces. NGOs, meanwhile, along with social movements, are viewed as the heroic vehicles for fighting against the repression of the state-corporate nexus by the anti-forces and are largely ignored by the pro-forces. Some proglobalization institutions, such as the World Bank, have created policies (one might say co-opted) to incorporate NGOs in their efforts, seeing them as allies with the advantages of local knowledge and flexibility.17 The state thus occupies the most paradoxical role in the emerging literature. For the purposes of this exposition, we focus on the “convergence” aspects of both the optimistic and pessimistic views. That is, the underlying hypothesis of both the pro- and antifree trade thinkers and activists is that there are overwhelming and irresistible forces for conformity within the international economy. The pressure point for these forces is, of course, the rollback of the state. In developing countries, the combination of debt- and finance-related budgetary reductions and the pressures for trade and investment liberalization seem overwhelming.18 Thus, the protests against the World Trade Organization are directed as much at the symbols of external pressures for domestic conformity, such as the reduction of welfare and other social and industrial protections, as at the idea of free trade itself.

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The key question of the day, then, is whether in the haste of apparent retreat, states can find niches and tools that will allow them to pursue their aims within the new global context. In the next section, we discuss how regulatory policy can act as an effective weapon for the preservation of national and public interests, even within the constraints of globalization. Regulations govern specific sets of related activities in industry, agriculture, and services known as sectors.

REGULAT O RY STR U C T U R E S A S E M B OD I M E N T S OF S T ATES’ REP ON S E S T O G L OB A L I Z AT I O N The R el ati ve Negl e c t o f S e c t o r a l P o l i c y While the majority of the development literature concerned with economic decision making has focused on the burdens of macroeconomic adjustment,19 there has been relatively little in the mainstream academic literature written, however, about microlevel or sectoral-level effects of globalization related to state autonomy in a developing country context.20 The related theoretical predecessors of sectoral analysis and state autonomy in international political economy, namely, domestic coalitions approaches, regime theory, and studies of international integration, by contrast, contained numerous analyses of sectors from the point of view of politicians and/or businessmen who pushed for liberalization and integration of economies, primarily with the example of the European Union (EU) in mind.21 The early wave of literature on industrial policy and flexible specialization of the 1980s, in response to the U.S. deficits and U.S. perceptions of competitive threats from East Asia, did look at how governments could promote particular industries to become more globally competitive, but generally failed to anticipate the dynamics of a deregulated and privatized industrial sector, which developed worldwide in the 1990s.22 Therefore, this earlier wave of theorizing worked largely on the level of the interactions of domestic- and international-level politics from the point of view of a whole sector’s lobbying actions in response to foreign competition, and a government’s reactions, rather than looking at the dynamics within particular economic sectors inside of, and across, economies. With the exception of the industrial policy literature, this wave of literature therefore predicted either protectionist or pro-liberalization

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stances based upon the general characteristics of an industry within a particular country. While the industrial policy literature presented a more nuanced range of possibilities and relationships between the state and private enterprise, the overarching analytical focus on national competitiveness led to oversights in the importance of differences within both state and domestic industries, as well as in the possibilities of transnational alliances by industries and states. In sum, most of these earlier analyses failed to predict the wave of global liberalization and integration beginning in the late 1980s, precisely because they did not see the sometimes vast differentiation among the diverse companies within a particular sector on the one hand, and underestimated the common interests of both states and companies (not necessarily in the same industry) across borders on the other. To take a simplified example, this literature fails to explain why some companies within the same sector may be proprotectionist, while others, perhaps because they have more established overseas market positions, will be strongly pro-free trade. Furthermore, a third group of companies in the same sector may be neutral, while a fourth may have mixed interests. In short, many companies interested in trade, particularly if they are conglomerates and/or multinationals, have much more subtle and sometimes (on the surface) contradictory stances than previous theories accounted for. The few exceptions to the generalization above regarding the literature are concentrated in the specific sectors of agriculture, labor, and environment. Moreover, while there are numerous recent examples of this literature, there is an almost exclusive empirical focus on the North American Free Trade Agreement’s (NAFTA) effects on Canada, the United States, and Mexico or on the integration process of the EU.23 In sum, the existing international political economy literature loses some of the specificity and richness of an examination of the effects of globalization on particular industries, consumers, and states as well as the dynamism that an intrasectoral level analysis brings to our understanding of globalization.24 It also ignores the important analytical step of examining the differences between North-South integration (e.g., Canada-Mexico), North-North integration (e.g., France-Germany), and South-South integration (e.g., MERCOSUR in South America). The reasons for this lacuna in the literature include the difficulty of understanding the technical workings of companies at an industry level and the lack of reliable microeconomic data in most countries outside the United

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States or Europe. In addition, private company data are usually difficult to obtain and to compare. Finally, the aspects of the new and dynamic processes of integration require a fresh wave of scholarship to match the youth of the phenomena. The E m ergence o f t h e R e g u l a t o r y Polic y App roach We can define regulatory policy as the way that a state guides, directs, and envisions its national markets. Regulatory policy is a set of rules, regulations, and norms that are enforced by the state. Moreover, regulatory policy is perfectly acceptable within neoliberalism, even desirable, in order to ensure smooth functioning of markets. Because of its legalistic and technical nature, regulatory policy is generally out of the purview of direct democratic action.25 Indeed, it is subject to “capture” by industries, who seek to shape its rules for their own benefit. Thus regulatory policy is a perfect vehicle for us to investigate the question of the (changing) degree of state autonomy under pressure from globalization. If we add the fact that neoliberal changes in macroeconomic policy are “a done deal” for developing countries hungry for foreign capital, we see that the real field of action for the future of developing country economic policy is at the microlevel. So far, studies of regulatory policy for most newly privatized industries have been largely left to business school case studies and agencies with the technical prowess to surmount the challenges noted above.26 Thus, industry level reports to policymakers are dominated by authors such as those at the World Bank and the Organization for Economic Cooperation and Development (OECD), as well as consultants or think tanks aligned to those industries.27 Part of my previous work documented and examined these groups and how they came to dominate the economic policy discourse and so, decision making.28 The nature and funding of the organizational ties of these authors limit the scope of their work, so that reports tend to shy away from critical treatment of international companies, any effects of the liberalization of industries, or any issue openly related to the politics of liberalization. Politically based critiques are largely covered up under a flag of economic logic in the neoliberal Washington consensus.29 On the opposing side of the argument, the critics of globalization tend to work on a very general level of reaction

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against the growing strength of corporations and international organizations and the harmful effects of free trade, including concerns about labor exploitation and the environment. They rarely move to the detailed level of analyzing regulatory policy. The result is not just a difference in interests, but an inability of either side to communicate to the other, and is partly responsible for the growing level of demonstrations seen at each international organization meeting, from the World Trade Organization to the World Economic Forum. A N EW WAY T O LOOK AT R E G U L AT ORY POL IC Y UNDER M A R K E T L I B E R A L I Z AT I ON Both the protests and the lack of understanding by the policymakers and multinational corporations point to several important missing elements in the discourse on regulatory policy in a liberalizing market. Yet, governments throughout the world continue to adopt deregulatory and integration policies along the lines of neoliberal experts’ advice. This translates into adoption of policies in semiblind fashion, that is, without really gauging: a. if the net benefits of deregulation are clear in the cases of specific industries; b. on whom the costs and benefits of deregulation primarily fall, and what adjustment measures can be instituted; c. to what extent differences in types of regulatory regimes can lead to different market outcomes.

The answers to these questions are relevant to all countries that are in the process of privatizing their industries and that have or plan to sign free trade agreements.30 It is equally vital to point out that the results of privatization, much heralded and vilified, are a “one-shot” issue, albeit one involving huge sums of money and significant long-term impacts. But it seems highly unlikely that privatization could be reversed in the present climate. The far more important question in the long run is how the privatized market will be governed through the regulatory system.31 A Be tt er Perspect i v e : D e r e g u l a t i o n as Reregul ati o n I suggest that, contrary to common perception, and indeed, its very moniker, “deregulation” and privatization of markets is neither a uni-

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form nor a sure process: Deregulation, I suggest, actually implies a reregulation of markets that can take a variety of forms and have a variety of effects.32 For instance, moving from a state-run telecommunications provider to a completely private market would require, among other things, the development of a regulatory agency and rules to ensure reliability, pricing information, interconnections, and adequate investment in the telecommunications grid. More importantly, the reregulation of a privatized market might also include policies and organizations to ensure, for example, universal service, adequate levels of competition, and cost reductions to all types of consumers. Thus, deregulation should be seen more as a new regulatory environment for business, rather than a “freeing” of markets. The forms of deregulation will have varying but extremely important economic and public policy results. We need to move beyond the existing models of political economy, which focus on international- or national-level outcomes, and to construct a framework of analysis that uses regulatory policy for a particular sector as the main focal lens, with a view to assessing the outcomes of SoCo energy deregulation policies. Of particular interest to our enterprise is if and how free trade agreements, namely, MERCOSUR, affect our conclusions about regulatory policy at the national level. N OTE S 1. I use Southern Cone to mean the MERCOSUR countries of Brazil, Argentina, Uruguay, and Paraguay, and including associate members Chile and Bolivia. 2. Hypothesis testing on quantitative data unfortunately does not lend itself to this task, which requires delineating complex and evolving relationships and responses of various actors over time. Simply speaking, no clear data set for evaluation can be constructed because the parameters and definitions keep changing. Thus a comparative case study is really the only methodology available for this task. 3. See the work of Merilee Grindle, Stephan Haggard, Peter Evans, Theda Skocpol, and Dieter Rueschmeyer, among others, on this point. 4. See Anil Hira, “Games States Play: Regulatory Industrial Policy in International Political Economy,” in Stephen McBride and James Busumtwi-Sam, eds., At the Crossroads: Global Turbulence, Political Economy, and the State (Ashgate, forthcoming), for an extended discussion.

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5. The best source of historical statistics for Latin America is found in Rosemary Thorp, Progress, Poverty, and Exclusion: An Economic History of Latin America in the Twentieth Century (Washington: Inter-American Development Bank, 1998). 6. As I discussed at length in Ideas and Economic Policy in Latin America: Regional, National, and Organizational Case Studies (Westport, CT: Greenwood, 1998). 7. I have completed a broader international survey of this theme in “Games States Play.” 8. Good recent introductions to globalization are found Theodore H. Cohn, Global Political Economy: Theory and Practice (New York: Longman, 2000) and Power in the Global Era: Grounding Globalization (New York: St. Martin’s Press, 2000); Richard Stubbs and Geoffrey R.D. Underhill, eds., Political Economy and the Changing Global Order, 2nd ed. (New York: Oxford U. Press, 2000); and Malcolm Waters, Globalization (New York: Routledge, 1995). 9. Zaki Laı¨di, A World Without Meaning: The Crisis of Meaning in International Politics, trans. June Burnham and Jenny Coulon (New York: Routledge, 1998), 6–7. 10. See, for example, Pascal Zachary, The Global Me: New Cosmopolitans and the Competitive Edge, Picking Globalism’s Winners and Losers (London: Nicholas Brealey, 2000); and Peter Stalker, Workers Without Frontiers: The Impact of Globalization on International Migration (Boulder: Lynne Rienner, 2000). 11. Of course, there are skeptics of the extent of globalization, primarily on the realist side in international relations and on the national predominance side in international political economy. For an example of the former, see Robert D. Kaplan, The Coming Anarchy: Shattering the Dreams of the Post Cold War (New York: Random House, 2000); and for the latter, see Richard Whitley, Divergent Capitalisms: The Social Structuring and Change of Business System (New York: Oxford U. Press, 1999); and Paul Hirst, “The Global Economy—Myths and Realities,” International Affairs 73 (1997): 409–25. 12. See, for example, Francis Fukuyma, The End of History and the Last Man (New York: Avon Books, 1992); Samuel Huntington, The Clash of Civilizations and the Remaking of World Order (New York: Simon & Schuster, 1996); and Robert D. Kaplan, The Coming Anarchy: Shattering the Dreams of the Post Cold War (New York: Random House, 2000). There is a huge popular market as well. For example, see Anne C. Leer, It’s A Wired World: The New Networked Economy (Boston: Scandinavian U. Press, 1996). 13. A good recent overview, generally on the pessimistic side, is found in Preet S. Aulakh and Michael G. Schecter, eds., Rethinking Globalization(s): From Corporate Transnationalism to Local Interventions (New York: St. Martin’s, 2000). 14. Information, technology, and communications are the revolutions that are driving much of the new theorizing. See Edward A. Comor, ed., The Global

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Political Economy of Communication: Hegemony, Telecommunication and the Information Economy (New York: St. Martin’s Press, 1994); and Manuel Castells, The Informational City: Information Technology, Economic Restructuring, and the Urban-Regional Process (Cambridge, MA: Basil Blackwell, 1989). 15. Henry Nau, The Myth of America’s Decline: Leading the World Economy into the 1990s (New York: Oxford U. Press, 1990). 16. For example, see Ted Schreker, ed., Surviving Globalism: The Social and Environmental Challenges (New York: St. Martin’s Press, 1997); and Colin Hines, Localization: A Global Manifesto (Sterling, VA: Earthscan, 2000). 17. I am more skeptical than much of the burgeoning literature on social movements’ transformative possibilities. For a more optimistic reader, see Robert O’Brien, Anne Marie Goetz, Jan Aart Scholte, and Marc Williams, Contesting Global Governance: Multilateral Economic Institutions and Global Social Movements (New York: Cambridge U. Press, 2000). 18. On the growing weakness of the state, see Martin Carnoy, “Multinationals in a Changing World Economy: Wither the Nation-State?” in The Global Economy in the Information Age, eds. Martin Carnoy, Manuel Castells, S.S. Cohen, and F.H. Cardoso (University Park: Pennsylvania State U. Press, 1993), 95–102; Susan Strange, The Retreat of the State: The Diffusion of Power in the World Economy (New York: Cambridge U. Press, 1996); Dani Rodrik, Has Globalization Gone Too Far? (Washington: Institute for International Economics, 1997); and Richard Falk, “Economic Aspects of Global Civilization: The Unmet Challenges of World Poverty” (Occasional Paper no. 22, Princeton U., 1992). Interesting rejoinders are found in Linda Weiss, The Myth of the Powerless State: Governing the Economy in a Global Era (New York: Cambridge U. Press, 1998); and Robert Gilpin, “The Retreat of the State?” in Strange Power: Shaping the Parameters of International Relations and International Political Economy, Thomas C. Lawton, James N. Rosenau, and Amy C. Verdun, eds. (Burlington, VT: Ashgate, 2000), 197–214. 19. See, for example, the series on economic adjustment by Stephan Haggard and Robert Kaufman, published by Cornell U. Press. 20. I am leaving aside the literature on European corporatism (Schmitter) and competing capitalist systems (Esping-Anderson) that does have sectoral-level focus, because none of this literature has been applied to developing countries’ sectoral decision making. My argument, then, is that the conditions in Bolivia are so different from those of Switzerland that a separate application is needed. Since my focus here is on state autonomy, I also leave aside the mostly developed country literature on policy networks and convergence, which I had discussed at length in Ideas and Economic Policy in Latin America. 21. We could argue about whether the globalization literature began with the early literature on economic integration dating back to the 1950s or with the

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seminal work of Robert O. Keohane and Joseph S. Nye Jr., Transnational Relations and World Politics (Cambridge, MA: Harvard U. Press, 1972) on transnational interactions in the 1970s, but in my opinion, globalization as the common focus of academic attention dates only to the 1980s. See, for example, Peter Gourevitch, Politics in Hard Times: Comparative Responses to International Economic Crises (Ithaca: Cornell U. Press, 1986); Ronald Rogowski, Commerce and Coalitions: How Trade Affects Domestic Political Alignment (Princeton: Princeton U. Press, 1989); Helen Milner, Resisting Protectionism: Global Industries and the Politics of International Trade (Princeton: Princeton U. Press, 1988); Wayne Sandholtz, High-Tech Europe: The Politics of International Cooperation (Berkeley: U. of California Press, 1992); and D. Michael Shafer, Winners and Losers: How Sectors Shape the Developmental Prospects of States (Ithaca: Cornell U. Press, 1994). While Shafer’s work is a brilliant step forward in terms of introducing a specific focus on sectoral analysis, he acknowledges that it is just a first step. His analysis is limited to sectors within nations and looks at comparisons on that level. His book predates the liberalization process that is the subject of this study. Another interesting study with a different focus that borrows from Shafer is Sylvia Maxfield and Ben Ross Schneider, eds., Business and the State in Developing Countries (Ithaca: Cornell U. Press, 1997). 22. For example, see Peter Evans, Dieter Rueschmeyer, and Theda Skocpol, Bringing the State Back In (New York: Cambridge U. Press, 1985) on the concepts of state autonomy; Robert Wade, Governing the Market: Economic Theory and the Role of Government in East Asian Industrialization (Princeton: Princeton U. Press, 1990) on a state-centric version of the East Asian miracle; and Peter Katzenstein, Small States in World Markets (Ithaca: Cornell U. Press, 1985) for the global niche and flexible adjustment strategies for small states in global markets. A recent article seeks to revive some of the early work in industrial policy. See Richard F. Doner and Eric Hershberg, “Flexible Production and Political Decentralization in the Developing World: Elective Affinities in the Pursuit of Competitiveness?” Studies in Comparative International Development (Spring 1999): 45–78. The classic work on industrial policy also includes the work of Chalmers Johnson, John Zysman, Laura D’Andrea Tyson, Gary Gereffi, Donald Wyman, and Alice Amsden. The classic work on flexible specialization includes the work of Michael Piore and Charles Sabel. 23. For example, see Benjamin Cashore and Ilan Vertinsky, “Policy Networks and Firm Behaviours: Governance Systems and Firm Responses to External Demands for Sustainable Forest Management,” Policy Sciences 33 (2000): 1–30; William P.D. Coleman and Wyn P. Grant, “Policy Convergence and Policy Feedback: Agricultural Finance Policies in a Globalizing Era,” European Journal of Political Research 34 (1998): 225–47; Barry Carr, Crossing Borders: Labour Internationalism in the Era of NAFTA, in Gerardo Otero, ed., Neoliberalism Revis-

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ited: Economic Restructuring and Mexico’s Political Future (Boulder: Westview, 1996): 209–32; and Victoria M. Murillo, “From Populism to Neoliberalism: Labor Unions and Market Reforms in Latin America,” World Politics 52 (January 2000): 135–74. The automobile industry, particularly in the case of NAFTA, has received some attention as well in the literature on Latin America. It is included in the pioneering work of Gary Gereffi and Donald Wyman, Manufacturing Miracles: Paths of Industrialization in Latin America and East Asia (Princeton: Princeton U. Press, 1990). Most of the limited initial literature on integration initiatives outside of NAFTA has focused on the language of the trade agreements and the implications vis-a`-vis international integration theory. For example, see W. Andrew Axline, “Free Trade in the Americas and Sub-Regional Integration in Central America and the Caribbean,” Canadian Journal of Development Studies 21:1 (2000): 31–53. 24. There are a few emerging exceptions, but these tend to be issue- rather than sectorally oriented. See, for example, Luigi Manzetti, ed., Regulatory Policy in Latin America: Post-Privatization Realities (Miami: North-South Center Press, 2000); and Moises Naim and Joseph S. Tulchin, eds., Competition Policy, Deregulation, and Modernization in Latin America (Boulder: Lynne Rienner, 1999). 25. See Hira, “Deregulation and Democracy,” forthcoming, for more on improving participation in regulatory decision making, as well as a review of regulatory theory. 26. We should also note the “more popular” tomes from the Japan-fearing 1980s about the sources of “national competitiveness” (such as the work of Michael Porter, Lester Thurow, and Paul Krugman) often featured the importance of leading high-technology industrial sectors. 27. For example, see J. Luis Guasch and Pablo Spiller, Managing the Regulatory Process: Design, Concepts, Issues, and the Latin American and Caribbean Story (Washington: World Bank, 1999). In terms of regional sectoral analyses of Latin America, the best technical source is the United Nations’ Economic Commission on Latin America and the Caribbean (ECLAC) or Comisio´n Economica Para Ame´rica Latina y el Caribe´ (CEPAL). Fernando Fajnzylber of CEPAL was a very early analyst of industrial policy in the region. However, as I discuss in my book, Ideas and Economic Policy, ECLAC’s analysis is severely limited by its political position (e.g., as a client of contributing governments). Even technical sources, while glossing over the political and social implications of liberalization, acknowledge the need to evaluate the impact of different types of deregulation. See J. Luis Guasch and Robert W. Hahn, “The Costs and Benefits of Regulation: Implications for Developing Countries,” The World Bank Research Observer 14, 1 (February 1999): 137–58. 28. Hira, Ideas and Economic Policy in Latin America.

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29. The Washington consensus refers to the policy package heavily promoted by the U.S. government and international financial organizations to developing countries, which includes tight macroeconomic and fiscal economic policies and liberalization of both capital and the trade sectors. See John Williamson, ed., The Political Economy of Policy Reform (Washington, D.C.: Institute for International Economics, 1994) for an early use of this term. 30. There are a few initial steps taken in terms of independent evaluation, but these efforts tend to be dominated by technical diagnoses of the regulatory process, rather than a wider view of the implications of, and alternatives to, that process. See Ariel Dinar, ed., The Political Economy of Water Reforms (New York: Oxford U. Press, 2000); and Judith Clifton “On the Political Consequences of Privatization: The Case of Telefonos de Mexico,” Bulletin of Latin American Research 19 (2000): 63–79 for two recent works that make analytical progress. 31. Steven K. Vogel, Freer Markets, More Rules: Regulatory Reform in Advanced Industrial Countries (Ithaca: Cornell U. Press, 1996), makes some very important points about the timing of the international deregulation wave. These include growing recognition of the costs of regulatory control and the parallel rise of the public interest literature; technological and other sources of reduction in transactions costs; and “regulatory arbitrage,” meaning competition among different entities (national governments, states, or municipalities) for businesses through creating friendlier regulatory and tax environments. See 10–12. I also leave aside for the purposes of this project the issues of the democratic accountability of “deregulation,” which is another debate altogether. See Giandomenico Majone, Regulating Europe (New York: Routledge, 1996); and C.D. Foster, Privatization, Public Ownership and the Regulation of Natural Monopoly (Oxford: Blackwell, 1992), for more on this topic. 32. This point is clearly made by Vogel, 2–4.

CHAPTER TWO

A Political Economy Framework for Sectoral Liberalization and Integration The Case of MERCOSUR Electricity Markets

IN TRODUCT I O N In this chapter we will seek to move beyond the existing models of integration that focus on international- or national-level outcomes, and construct a framework of analysis that uses a particular sector as the main focal lens. D. Michael Shafer’s book, Winners and Losers, paved the way for international political economy analyses of how sectors related to developing countries’ economic policies. Shafer takes head-on the effects that the characteristics of the leading and dominant economic sectors of a developing economy can have on economic policy decision making. In short, Shafer points out that the characteristics of the production process, such as barriers to entry and levels of capital intensity, have important consequences on state and societal capacity, autonomy, and flexibility. He indicates that an extremely capital-intensive high economy of scale industry will likely have a great deal of power vis-a`vis the state. He illustrates his points using case studies including Costa Rica’s coffee sector. Terry Lynn Karl states it best: “dependence on a

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particular export commodity shapes not only social classes and regime types, . . . but also the very institutions of the state, the framework for decision-making, and the decision calculus of policymakers.”1 We go well beyond Shafer’s analysis because we are facing a new reality in the international and domestic economies. Economic liberalization, spurred by global forces, can be seen as an unfolding process that begins with national deregulation, proceeds through privatization, and culminates in the international integration of markets, marked by trade agreements.2 The new reality of economic liberalization leads us to create a sectoral analysis, which is not necessarily tied to national strategy or (exclusively) national outcomes. Rather, the liberalization process forces us to think about a whole new set of relationships between the state and the sector that can vary from laissez-faire to one resembling a statedominated industrial policy. The new environment also calls for the inclusion of foreign investors, intersectoral alliances, and transnational alliances among sectors and liberalization opponents. Naturally, the configuration and power of the actors in each relationship will not only be dynamic, but vary by sector and industry. The new terrain for sectoral policy is thus no longer the domain of industrial policy, but of regulatory policy toward marketized sectors. Our focus, therefore, is on the institutions of the state and the coalitions of interest groups for and against electricity market liberalization. By sketching out political coalitions and inner workings of states in regard to electricity reform, we can create a framework for testing out the degree and character of state autonomy in our case studies. When we discuss “sectors,” we refer to sets of economic activities related to the production of a particular type of good or service. Thus, a sector can include multiple industries, such as equipment suppliers to power generators and the generators themselves, as well as the management and labor involved in the production process. Delineating the precise lines of a sector is tricky; in national statistical principles, for example, it is hard to define exactly what falls into the wholesale trade sector. However, in the energy sector, the lines between sectoral industries and related industries are clear, as we set forth below. Why focus on energy as a case study of regulatory policy toward sectoral development? Among the various sectors of any economy, perhaps the most basic and vital sector is the energy sector. The energy sector is the sine qua non of any modern economy. The price of elec-

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tricity generated by the energy sector affects all economic production, and thus the price level of all consumer and industrial products. Moreover, the reliable and affordable provision of electricity is a concern in all social endeavors, since it is vital to providing the basic conveniences of everyday life. Like other basic infrastructural industries, not only the price, but also the need for universal provision makes it an immensely important sector. Electricity, likewise, was considered just 10 years ago as a natural public monopoly, due to its high capital and sunk costs, its ability to affect other industries’ prices, and the desire to subsidize (usually rural) customers that the private market would have neglected. This chapter will explain not only what changed in the electricity sector, but why, and who benefits. While the framework here is set up for understanding the winners and losers in the politics of electricity and gas liberalization in the Southern Cone, it could be applied to the regulatory politics of any sector. WHY HAVE CO UN T R I E S L I B E R A L I Z E D T H E I R ELECTRI CIT Y MAR K E T S ? Much of the discussion of globalization results from the transformation of the international economy over the last three decades. Perhaps the two most important pillars of that transformation are the liberalization of international capital flows in the early 1970s and the liberalization of domestic markets and international trade that began later in that decade. In the 1970s, when the first moves toward electricity market liberalization were taken, two contextual events are key to understanding why deregulation of various industries spread internationally in the 1980s. The first is the neoliberal revolution in ideas, which I have discussed earlier and elsewhere, that began in Chile and was consummated by President Ronald Reagan and Prime Minister Margaret Thatcher in the United States and the United Kingdom in 1980.3 As I have argued elsewhere, this revolution was enabled by a “paradigmatic crisis” in terms of perceptions of the failure of import substitution policies in Latin America and of the answers provided by neoliberalism.4 The second is the simple change in economic fortunes of the Latin American countries. With the Organization of Petroleum Exporting Countries (OPEC) oil price shock of the early 1970s, countries worldwide began revisiting their national energy policies. In most of Latin America, where

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energy had to be imported, this blow to its economic growth was multiplied by the debt crisis of the 1980s. Thus, a new belief in the efficiency of markets found a policy space with the onset of severe financial problems.5 Latin American economies, in the throes of the debt crisis, largely adopted the deregulation and privatization policies with increasing vigor over the course of the 1980s. The first sectors to be liberalized in Latin America tended to be the financial and trade sectors. The reasons for this timing were that these sectors seemed to be most intimately linked to the macroeconomic imbalances affecting the region during the debt crisis woes of that period, and, therefore, the sectors most susceptible to international pressures for liberalization. However, as the debt crisis was alleviated by the end of the 1980s, the push for deregulation and privatization gained greater momentum on the domestic level as part of a broader neoliberal agenda for the political, economic, and social spheres. As the neoliberal project became the hegemonic discourse in Latin America, on the policy level the push for privatization and deregulation continued to move forward. Thus, a second wave of the deregulation push has led to the privatization of basic industries and infrastructure, a move that would have been unthinkable even in the developed countries just 15 years before. The electricity sector has been one of the basic infrastructure industries to be privatized, along with roads, and followed by water and sewage systems. Now, a third wave of the neoliberal project is emerging, namely, the linking up of basic infrastructure grids and the trading of basic infrastructure, such as electricity, across international lines, a move again that would have been unthinkable just 10 years ago as public policy and that we explore in chapter 4. In addition to these contextual factors, there was a widespread perception that the state-owned enterprises (SOEs) for the import-substituting industrialization (ISI) period had insoluble problems, particularly in the electricity sector. These problems included the lack of investment for new capacity amidst rapidly increasing demands, overbloated payrolls with little in the way of performance or accountability standards, and inability to charge adequate amounts overall to pay for all of the costs, including financing. Small wonder, then, that the newly democratic governments of Latin America, like that of President Carlos Menem in Argentina, saw privatization and deregulation not just as a method

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21

of corruption, but also as a clear means to address the budgetary and balance of payments problems exacerbated by the debt crisis. Moreover, privatization has the additional incentive of attracting foreign investment to both the electricity sector and the nation in general. At the same time, the development of the combined cycle turbine decreased economies of scale in the generation of electricity, and coincided with the desires to develop natural gas energy as a more environment-friendly fuel. After Chile privatized its energy sector in 1982, its model was considered a success internationally. Thus, the general turn in economic policies toward the right internationally was accompanied by a demonstration effect in Chile that could serve as an example for policy reform. Developing countries see privatization as the spigot that can open the waters of international investment, which are vital to getting their economies moving again. Add to this the fact that the capital requirements of the energy sector may be the highest of any sector of an economy, and the technology requirements challenging as well for developing countries. The twinned argument of an increased electric efficiency (leading to increased national competitiveness) and an ability to bring in fresh foreign investment and technology transfer is a combination that makes electricity deregulation all but inevitable. Privatization thus has both an empirical and a discursive effect in changing and locking in neoliberal sets of reforms, including reducing the role of the state.

TH E BASI CS O F EL E C T R I C I T Y R E G U L AT I ON For those readers who are less familiar with electricity market regulation, this section can serve as a quick guide to the issues in layman’s terms.6 The electricity sector, for the purposes of regulation, should be considered as consisting of three basic subsectors: generation, transmission, and distribution. In many developed countries, state or stateregulated monopolies usually took over from small and localized private electricity companies early in the twentieth century. Or, the state began the actual work of creating the national electricity grid through its own agencies in the absence of private interest or capability. In either case, until recently, the government ran or regulated a private monopoly of the entire process of electricity production and delivery.

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Political Economy of Energy in the Southern Cone

For the purposes of privatization, however, the process of creating electricity is divided into different segments or subsectors, since each segment involves different market conditions (as we shall explain later). Each subsector requires different regulations. Similarly, the types of electricity customers fall into two basic categories for the purposes of regulation: large industrial customers who purchase wholesale amounts of electricity, sometimes only during working hours of the day, and retaillevel customers who purchase smaller amounts throughout the day, particularly in the morning and evening. It therefore makes perfect regulatory sense to divide these types of customers into distinct markets. The generation segment of the electricity process, the first subsector, is that in which fuel is transformed into electric power.7 Every country has a different fuel source mix, depending on its resource endowments and its policy choices of which fuels to favor at different times. The most common fuels for electricity generation are diesel (from petroleum), coal, natural gas, nuclear, and hydroelectric dams. There are a number of renewable fuel sources, such as biomass, solar, tidal, and wind, that are also used on a limited scale, because of supply volatility and cost concerns. Countries with an abundance of rivers will naturally have a strong component of their electricity fueled by hydropower, but the predominant source of fuel for electricity throughout the world has been coal. In recent years that has changed. New technologies have enabled cleaner natural gas production to become quite competitive, and environmental opposition to new coal and hydro generation has solidified. The “fuel mix” is a vital component to any analysis of the regulatory structure that a country adopts, both from a technical standpoint and from a political economy standpoint. Throughout the privatization schemes, the generation subsector has been the easiest segment in which to introduce competition. The development of a robust international capital market and the improvement of technology over the last two decades have meant that the economies of scale are now surmountable enough to introduce competition. Generators compete on the basis of the cost of their inputs, namely fuel, equipment, and personnel, and the efficiency of their production. The geographic layout of a country in terms of where the customers live and where the fuel supplies and/or main ports lie, as well as the timing of entry into the generation market, are key factors in the development of the generation subsector. Although each generator may differ widely

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23

from its competitors in terms of location, fuel mix, personnel, equipment, and practices, a market would ideally be set up that allows for easy entry and departure and use of pricing as the ultimate signal of efficiency. To the customer, in short, the way that a standard unit of electricity is delivered is not important; what is important is the reliability of use and how much must be paid (i.e., the price) for it. Generation also requires transmission of the electrical power, the second subsector, to the customer. This delivery may take place over highvoltage (volume), long-distance transmission wires, depending on how far the generator is from the customer. An important point to note is that electricity loses some of its power over distance, and to minimize the capital costs of the transmission grid there is an automatic incentive to locate generating facilities close to the customer.8 Nevertheless, the geography of a country may not allow for this. For example, the hydroelectric sources (dams) may be located at considerable distance from industries and population centers. Because there are high capital costs in building transmission lines, and such lines require dedicated public access areas and are of considerable expense, most people think it does not make much sense to build multiple transmission grids. Therefore, in terms of delivering the high-level amounts of electricity, the transmission grid is often thought of as a natural monopoly, requiring a separate set of regulations. Ideally, this set of regulations would allow equal access to “the grid” for any generator that wanted to come on line, and some type of entity, whether a public or private organization, that can maintain, operate, and expand the transmission lines as needed. However, because the power capacity of the transmission lines is limited at any given time, a regulatory scheme must also create some kind of system operator, who could dispatch, or allow access to, the grid for generators during a given time slot and in an order that is economically optimal for the generator, the customer, and the public interest. Reliability is probably the key value of the system, even more so than price, and so the functionality of the system operator is the linchpin to the whole system. I would argue that reliability is also the key to political activity by retail customers as well. It is mainly in the cutoff or rationing of power in the recent cases of California, Chile, and Brazil that we see strong political action to overhaul the regulatory system. The third subsector on the supply side is the distribution segment. Once electricity is delivered to the area where a customer is located, the

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voltage must be “stepped down” for use on the retail level. While sending larger voltage is preferable over long distances, since less power is lost, the voltage has to be stepped down at the point of distribution to customers for safety reasons. Therefore, some organization is needed to maintain and expand the local grid that delivers electricity from a few high-voltage transmission wires to the multitude of local businesses and homes that need it at a lower level of voltage. As in the case of transmission, most people conclude that it does not make sense to have multiple distribution grids in a given area, thus distribution is also considered a natural monopoly. There is a direct relationship between the amount of power and the size of technological equipment, so that the capital costs of equipment figure into the way that both the transmission and the distribution sectors are set up.9 A central ideal of any market is to charge the marginal cost of production according to how much the customer consumes at any given time. However, electricity must be delivered as a continual flow, rather than in discrete amounts; technology for continuous measuring of customer usage (meters) is expensive; and long-term storage is not costeffective, so the market poses unique challenges. Distribution involves two sets of regulations for two different types of customers. For large users of electricity, such as factories, it is economically feasible to deliver dedicated distribution lines and to install meters for power usage. For small businesses and retail consumers (wherever people live), however, metering is expensive, and there may be myriad smaller current distribution wires needed for delivery. While factories often will only use electricity during working hours, the “peak” hours for residential usage will be in the evening and early in the morning. There will be few users in either place in the middle of the night. Therefore, the regulation of distribution must account for the differences among these two types of users, including how much and when they use the electricity, as well as be capable of delivering the “peak load” during the period of highest usage. On the wholesale level of industrial users, distribution has been more competitively regulated, so that in some cases, a few large enterprises may even be able to negotiate directly with generating companies or to develop their own distribution systems. In general, deregulation of the distribution sector means moving away from a rate of return system, in which companies are guaranteed a rate of return and may therefore “pass through” their costs to customers with little incentive to

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reduce costs. The new system adopted is called a “price cap” system in which a (usually declining) price ceiling is set and reviewed along with quality standards for periodic adjustment by the government, using expert consultants.10 The complexities of electricity regulation and management are myriad and have consumed volumes of technical print. For the purposes of this study, we want to explain electricity regulation only to the extent that it allows us to evaluate its effects on customers and public interest amidst globalization forces. As we shall see in the detailed case studies that follow, differences in the way that electricity is regulated can have profoundly different effects on the outcomes for consumers, electric companies, and public interest. REREGULAT I O N IN T H E E L E C T R I C I T Y S E C T O R Though lacking objectivity or theoretical framework, the growing technical literature on regulatory policy provides a useful framework for understanding the “efficiency” of different systems of deregulation.11 It points out the need for regulatory independence, since regulation is subject to “capture” by private interests, and the state must act as the independent referee for market competition.12 The technical literature also points out the need for effective antitrust and environmental policies. Moreover, the literature highlights the importance of well-functioning institutions and institutional rules. Furthermore, the literature talks about the continuing need for clear information, including pricing signals, in order to reduce uncertainty and transactions costs. The state must continue to play selected roles as an enforcer of rules, particularly in the area of contracts. Thus, the literature points out that “deregulation” should actually be considered “reregulation,” in the sense that the role of the state in the new environment is a vital one of a market facilitator, rather than a market provider.13 Despite the important contributions of the literature on regulation, the superiority of deregulation is largely taken as a given.14 The deregulatory analysis rightly chides the “bloated” SOEs, lack of competition, cross-subsidization, and subsidization of the electricity or electricityconsuming industries in terms of creating inefficient pricing mechanisms for the electricity market. However, this literature misses the basic rationales for the very existence of these “inefficient” practices. First, the

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electricity industry was considered to be a natural monopoly until quite recently.15 Therefore, the state viewed its role as regulating the price and quality. In developing countries, the initial production of electricity was generally limited to isolated urban areas, such as that provided by Light company in Rio de Janeiro. There was no other actor who could provide a national electricity infrastructure other than the state. Second, the electricity industry might have been inefficient in pricing terms, but the existence of a bloated administrative staff made perfect political economy logic. Unstable governments in developing countries, with weak backing political coalitions, saw SOEs as a good source of patronage employment. The employment of skilled workers in the bureaucracies arguably served as a vehicle of social mobility for a nascent middle class in developing countries, and also had positive contributions to human capital. While the net effect may have been higher electricity prices, in short, we cannot simply isolate one particular market (electricity) and ignore the effects of increased public hiring on another (labor). The public unions now provide the strongest resistance to deregulation and privatization. Third, the lack of competition in the electricity industry allowed state enterprises in the developing world to gain expertise in building large infrastructure projects, thus increasing the technical human capital base. To a large extent parts and consultants were provided by domestic private subcontractors and foreign suppliers, so that to speak of the state-owned electricity utility as purely public overstates the reality of the situation. Fourth, the dominance of the state also allowed for cross-subsidization of particular sectors and consumers. In Brazil, the less developed Northeast region received subsidies through higher charges on the consumers in South and Southeast Brazil, and certain industries received subsidized power as part of Brazil’s successful industrial policy. In sum, the line that the current literature sells about the clear “optimality” of the market misses the point that, from a political economy point of view, the development and dominance of the power industry by the state made perfect sense at the time, and still has important positive aspects. This brings us to the present situation, where in light of the twin pressures for debt repayment and new investment, most developing states are finding themselves forced to sell off SOEs. If the convergence view of globalization is correct, we should see relatively uniform open regulatory regimes for the electricity sector. Instead we find rather stark

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differences in regulations in South America among the different countries.16 The differences in deregulation can be linked to: different levels of state autonomy and capacity vis-a`-vis foreign investors, domestic private suppliers, and public suppliers in creating new regulatory boards; international learning; and dynamic effects of regional integration projects. We turn now to a political economy framework that will allow us to understand those differences in our case studies. D IVIS I O NS W I T HIN T H E S T AT E R E G A R D I N G E LECTRI CIT Y MAR K E T L I B E R A L I Z AT I ON Any framework that purports to sketch political economy relationships should begin with a brief description of each actor, an assessment of the actor’s general interests and power, and a possible alliance that the actor can form. The basic horizon for electricity liberalization includes the following actors most prominently: the state, which can be broken down into various ministries; private investors, who in a developing country will be mostly foreign; generators of electricity; industrial users of electricity; retail users of electricity; and NGOs that seek to modify or oppose the liberalization process, such as pro-environmental groups. The movement toward integration considerably complicates our model, so we shall tackle that in a separate model to be discussed later. When we consider the state, we usually refer to all levels of government, whether national, state or provincial, or local. However, the state’s basic stance can vary depending on the level and ministry of the government. On the national level, the ministries or agencies that tend to be most interested in electricity market reform usually include just a few actors. First, and most important, there is the executive office itself. As we shall see, in every case the liberalization process was begun by a strong executive with a firm conviction that liberalization would be in the national interest (as well as other interests, of course). Latin America tends to have a tradition of strong executive leaders, so this aspect may be more exaggerated there than in other areas, such as the Western Europe, the United States, or Canada. The executive tends to act not only as the broker, or deal maker, for the alliance of pro-liberalization forces, but also as the deal killer, with a soft (tacit) or hard veto power that can limit counteraction and movement in other trajectories. Second, the finance and treasury ministries tend to be strong advocates for elec-

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tricity liberalization as it helps them to balance the nation’s financial imbalances in a number of ways. Most importantly, liberalization brings in a flood of receipts and new investments from privatization. Moreover, liberalization reduces the drag that SOEs almost always have on the national treasury. Third, the commerce or trade ministry tends to be strongly pro-liberalization. As a representative of national industry, it makes perfect sense for commerce to be heavily in favor of liberalization, which can reduce electricity prices across the board. Fourth, there may be an environmental agency with mixed feelings about the process. On the one hand, privatization could afford environmental issues a new portfolio with which to reduce energy-creating emissions, by using the tabula rasa of reregulation to create tighter and more widely enforced environmental rules. On the other, privatization could also mean that the ministry will have even less influence, since it is now dealing with private, and sometimes foreign-owned, actors, rather than state-owned companies. Last but not least, the liberalization process entails the creation of new regulatory actors. These actors, at least in Latin America, usually consist of three separate bodies. The first is a general body that sets the policy direction, and may also be the site for dispute resolution. This agency is usually part of the executive council, such as a ministry or subministry of mines and energy. The second is the new regulatory agency itself, which sets day-to-day policy and creates and interprets regulations. The third includes the actual system and wholesale market operators. Each of these three bodies exists only if the liberalization process moves forward, but each constitutes a powerful force for freezing in a liberalized system once in place. Fourth, let us not forget that certain SOEs, which expect to be able to continue to operate, or parts of them, may actually look forward to the new environment. They may feel less shackled and confident that they can compete and thrive in a privatized environment. The forces against liberalization of the electricity sector seem less numerous, but are often quite powerful, since they stand to lose everything in the process. These actors include those who receive subsidies, such as the SOEs themselves, government workers in either the enterprises or the present ministries who stand to lose their jobs and who are often highly unionized in Latin America; the military, which often looks at energy supply as a national security issue;17 certain consumers, such as particular industries that often receive subsidized energy; and compa-

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nies, often private, that currently sell services or products to the SOEs and who may be afraid to compete with foreign companies. A particularly important actor in some cases are indigenous groups who have resisted or changed the conditions of energy policy in some regions. These groups, with help from international activists, have been especially successful in preventing new (ironically clean) hydropower projects from going forward. Interests of states or provinces and local governments in the electricity game vary greatly by nation and by state. In Chile, for example, the central (national) government controls all the power. In Brazil and Argentina, however, certain states and provinces can greately influence the liberalization process, as we shall see in the case studies. In general, we see that both energy-exporting and high-energy consumption states, provinces, or localities are in favor of liberalization, and those who receive energy subsidies are opposed. Some relatively remote or nonindustrialized states might also oppose liberalization on the grounds that their consumers would be relatively neglected by private companies who see a relatively low economic profit in serving the area. Pr o- a nd Ant i -El ect r i c i t y L i b e r a l i z a t i o n Coalit i o n s in t h e S o u t h e r n C o n e For our purposes here, it is important to identify the political coalitions that support, or oppose, the liberalization of electricity that then attempt to lobby state decision makers. As we might expect, foreign and domestic investors as well as industrial consumers of electricity are enthralled with the possibilities for engaging in an emerging and generally underserved market. As is the case of the industrialized countries, large pension funds seem to dominate stock portfolio decisions, and so directly influence the possibilities for finance in the emerging market. We should note that the SOEs that will continue to compete after liberalization, such as Eletrobra´s in Brazil, may have strong financial ties to these funds. Foreign energy companies and related services, including potential public concessionaires, stand to gain enormously from liberalization, and are very strong proponents and funding sources of the process. In Latin America, civil service employees’ unions tend to be fairly strong, so they represent a real and important opponent to liberalization.

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In general, as discussed above, privatization inevitably means the loss of jobs for some of the employees, so their stance tend to be last-ditch. NGOs, such as environmental and energy-efficiency groups, may either oppose or seek to strongly modify the deregulatory and privatization processes.18 While generally weak, their influence varies greatly by issue and country. Finally, residential customers tend to have very strong expectations of improvement in service and of steady reduction in prices following privatization. When these expectations are not met in the always messy process of liberalization, they can form an important consideration. We should add to this mix the general play of public opinion about the issue, particularly since all of the governments in Latin America, with the exception of Cuba, are now democratic. While certainly not a decisive factor in Latin America, public opinion definitely influences government actions. When electricity prices rise dramatically, as occurred in Chile in 1997–98 during a drought, the government must respond with decisive measures to curb the ill feeling. As we shall see in the case studies, public opinion thus acts as a check upon the outer parameters of the system, demanding changes when prices greatly exceed expectations. On a more day-to-day level, consultants play a vital role in shaping government policy on energy. For instance, Argentina recently hired the U.S.-based firm National Energy Research Associates (NERA) to study the problem of transmission congestion. Brazil’s electricity system was based upon heavy input from a commissioned study by Coopers and Lybrand.19 On a regular basis, consultants are vital sources of expertise in setting up distributional tariffs, regulation policies, and corporate strategies. Many government officials “descend from heaven” by accepting consulting or corporate positions after leaving office, thus cementing the strong ties of these knowledge networks.20 A major role of these networks is to “technify” energy issues, so that the discourse about energy policy remains insulated from both the public and the politicians, and seems to focus on issues of fact to be formed on the basis of expertise, rather than value judgments. Given our analysis, it should be no surprise that the pro-liberalization forces are so strong in Latin America. Not only is the pro-liberalization coalition much stronger, but its ideological argumentation is much better developed and unified than that of the opposition. We should not

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leave the impression that neoliberal ideas are just a planned crude justification for material purposes. Rather, many of the pro-liberalization forces are true believers in neoliberal ideas. Not only that, but we can say that neoliberalism, as other well-developed ideologies, acquires an autochthonous and independent quality. Thus neoliberal ideas develop a life of their own and change naturally through the public discourse and events that occur. This shows not only the versatility of the neoliberal ideology, but also the ability to translate that ideology into meaningful everyday values. Thus, to the public who begins to adopt those values as a worldview, for example, the idea of a SOE being more capable and efficient seems to be less and less plausible over time. In the case of electricity, therefore, when problems arise, the issues revolve more around an execution of the regulation (e.g., some manipulation of the market) rather than around a questioning of the system itself. Figure 2.1 illustrates the coalition opposed to liberalization. TH E PO TENT I AL C OS T S A N D B E N E F I T S OF ELECTRI CIT Y I NTE G R AT I ON We have already discussed the main potential problems of privatization and deregulation including: the creation of new and unproductive monopolies, oligopolies, or collusions; the increased volatility of foreign

Figure 2.1 Political Economy of Deregulation

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Political Economy of Energy in the Southern Cone

investor speculation; the development of sharp differences among regions or consumer groups; the lack of independence of the system and wholesale market operator; the lack of long-term investment in the grid; and the increased difficulty of dealing with externalities, such as labor and environmental effects. In this section, we discuss how these problems change with the move toward integration. In chapter 4, we discuss the various stages of electricity market integration. For the moment, let us define it generally as policies allowing for direct market influence to and from other countries.

Potent i al Co sts an d P r o b l e ms o f I n t e g r a t i o n o f E le ctricit y Syst em s Integration presents some unique problems. Integration adds an exponential mountain of complexity in terms of the need to deal with local, domestic, and cross-border regulations and customs. In institutional terms, full integration of markets is perhaps unsurpassed in terms of the level of complexity for uniting both economic policy regulations and interests. Below, we will describe some of the different paths that integration can take and each of the potential results. For the moment, imagine the immense difficulty of coordinating two different regulatory bureaucracies, and then multiply it by the potential number of partners. Integration may create even greater incentives for the consolidation of market power into monopolistic or oligopolistic predatory practices. First, as companies begin to consolidate their market positions across borders, they can prey on smaller companies that might have survived in a purely domestic market through their concentration of financial, technological, and managerial assets. Second, the volatility and reliability of electricity supply, whether from fuel supply mix or macroeconomic, political, social, or other conditions of one country can increasingly affect that of its partner, as we shall see in our examination for the potential of a Brazil-Argentina integration. Third, the consolidation of national power centers, such as Buenos Aires and Sa˜o Paulo–Rio de Janeiro may leave the hinterlands of each country even more isolated and lacking in resources. This brings up the whole problem of how to rearrange federalist relations (state or provincial rights), which we are unable to explore here. The same effect, in a way analogous to trade

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diversion,21 may occur to the smaller nation partners in an integration, such as Paraguay, and to the domestic companies there. Fourth is the dynamic effect upon the markets themselves. Prices, related industries, supply chains, and consumer rights are all affected by integration. Most technical analyses focus on the fact that the local prices of electricity in the exporting country will increase, while those of the importing country (at least in the local area of importation) will decrease, but clearly much more is involved than that. Fifth, integration may make the problem of dealing with externalities that much more difficult. The level of national dedication to dealing with labor adjustment and environmental problems may be watered down to the threshold level of the least-dedicated partner, and it may simply be harder to organize and implement new environmental regulations. As the relative strength of corporations increases, furthermore, the level of regulatory power by national governments or a coordinated international body may weaken commensurately. And sixth, in relation to this point, is the problem of jurisdiction in regard to commercial disputes. Thus far the limited number of transactions have meant that provisions for dispute arbitration have been embedded in contracts, but if trading took place on a wider scale, much more accessible dispute mechanisms would have to be set up. Potent ial Benefit s o f I n t e g r a t i o n We have already discussed how integration is a logical next step in the process of economic liberalization. Using the same logic as the process of deregulation and privatization, it seems almost inevitable that countries would proceed toward integration of markets. Integration, on paper at least, provides some of the same benefits as deregulation and may add a few new ones, as well as some new costs. The main benefits of liberalization and privatization are the ones we have explained previously, namely increases in cost efficiency, service coverage, and quality of service through: stiffer competition, use of more advanced technologies, foreign investment, putting scarce public resources to other uses, and reductions in production costs (including labor and management costs). Integration adds the potential benefit of enlarging the size of the market with the following expected results: increases in the amount of competition; improvements in the security

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of the system by allowing for more sources of generation and transmission increasing the economies of scale and [the] levels of technology and investment that can be reached; and reductions in the transactions costs both in international trading and in domestic production through consolidation of assets by companies. Integration also reduces the transaction costs of running the market. (Those costs include administration of dispatch and wholesale market operation; training and development of capable bureaucrats to manage the system; sharing of capacity and investment; and development of a set of clear standards for quality assurance and long-term investment in the market.) Moreover, integration adds complementarities to each market in terms of diversifying the fuel source mix, the types of customer and peak hour usage, and the sharing of expertise. In short, in terms of both net increases and complementarities of markets, the logic behind integration seems fundamentally sound. THE PO LI T I CAL EC ON OM Y OF E L E C T R I C I T Y INTE GRATI O N We should mention the important differences that the integration of electricity markets entails from deregulation and privatization of the domestic market. First, integration of electricity markets differs in the process by which it is initiated. Because integration by definition is international, it must receive the approval of top government officials. However, since foreign relations in the Western tradition are left up to the executive office, in many cases integration escapes much of the domestic political system that might prejudice its growth.22 Second, integration of electricity markets has important national economic and political implications. It means an increased degree of reliance on a neighboring country for imports and/or exports of electricity, as well as a potential for quality, investment, and other problems that may arise from being linked to another electricity grid. On the other hand, integration of electricity must be seen within the wider neoliberal context, that is, a general agreement on market values and on allowing private decision makers to allocate resources. This logic knows no borders, and so it seems perfectly natural to move toward integration after domestic liberalization. Third, integration must be seen as part of a wider national geopolitical strategy for constructive engagement with neighbors in both

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political and economic terms. It can have the spillover effects of reducing political tensions as well as the important economic benefits of ensuring market access to national firms. Moreover, national firms will have more assurance upon entering the partner’s market, and foreign investment will be much more attracted to the newly integrated market. Also, national firms may thus gain the economies of scale in marketing and capital to allow them to compete on an international level. Thus, integration must be seen not only as an extension of the market principles to the international arena, but as an important component of geopolitical strategy. These important aspects of integration open the way for a new actor to enter the political economy process in Latin America, namely regional organizations, such as MERCOSUR, CIER, CEPAL, and OLADE. These organizations do have some independent power in terms of having funding bases from corporations, governments, and international organizations, but more importantly they can serve as independent brokers, fora, and mediators for parties engaged in the integration process. They can voice opinions that might not play well in the domestic political arena, since they are nominally independent. They also are important sources of sectoral economic and technical research. These organizations can be especially helpful, therefore, in smoothing out the less controversial aspects of integration, such as tax and subsidy questions, quality of transmission issues, contractual dispute resolutions, and so forth. They serve to help to “depoliticize” and further “technify” the integration process. Though interjecting a few critiques here or there, these regional commissions are strongly pro-integration, not surprising given their source of funds and organizational goals. However, the international benefits of integration also entail important adjustments as well as vulnerabilities that have domestic political repercussions. Most obviously, integration has important price effects on both markets. For the country that is importing electricity at the time, electricity prices will decline, but local generators will face more competition. For the exporting country, prices will naturally increase. Thus, the political problems for the exporting country ironically tend to be greater, especially if the trend of electricity prices in the country has stayed stable or actually increased recently. These price increases, depending on how the system is designed, may be concentrated in a local price node in an area near the border of exportation. In this case,

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Political Economy of Energy in the Southern Cone

the local and state or provincial politicians may take up arms to protest the increases. Similarly, states or provinces that produce the fuel stand to gain and will thus oppose any obstacles to further integration. In this game, we would expect energy producers in the importing nation to be opposed to integration, but this does not seem to be the case in the SoCo countries. Integration also has important employment effects. The protests against price increases may be slightly dissipated if the integration process has brought new jobs at power plants or in equipment construction. In general, integration can elevate previously peripheral border provinces to new levels of importance and attention in the national agenda, as well as increase their national economic importance (Figure 2.2). Ironically, integration is also used as a tool to “lock in” domestic political economy reforms. Thus, the strategy developing countries often use of blaming the International Monetary Fund (IMF) for an imposition of budgetary constraint and reduced state payrolls can also be used as a reason for locking in electricity reforms. Therefore, pro-liberalization forces make the claim, not without reason, that countries that fail to liberalize will be left behind the dynamic and foreign investmentattracting sectors of other economies. Liberalization, by strengthening a country’s electricity sector, can also be seen as a method of strengthening a country’s geopolitical position• •

•

Exporting Country Opponents: frontier & local importing consumers, industries, governments Proponents: generating/fuel supply regions, generators, governments, international organizations, multinational corporations

• •

•

Importing Country Opponents: generators & generating/fuel supply regions Proponents: industries, international & regional organizations, governments, multinational energy corporations, possibly consumers

Figure 2.2 New Dynamics of Electricity Integration

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ing. The sector may become competitive enough to “pick off ” cherries, the easy investments in economies that lag behind the deregulatory process. For example, Chile’s early privatization (as well as other factors we discuss later) contributed to the development of electricity companies that have made significant inroads into other Latin American markets, including Argentina, Brazil, and Colombia. Integration, especially in the form of treaties linked to wider aims, such as the consolidation of MERCOSUR, can also be used as a reason for locking in a deregulated and privatized structure. In sum, the exigencies of geopolitical strategy provide real as well as rhetorical claims for the necessity of deregulation and privatization, even though the losses and gains are far from equally shared, as we shall see in our case studies. NOTE S 1. Terry Lynn Karl, The Paradox of Plenty: Oil Booms and Petro-States (Berkeley: U. of California Press, 1997), p. 7. 2. We could argue about the ultimate sources of liberalization and integration, but for me the taking of one step leads inevitably, over the long run, to the next. Once the ideas and values of neoliberalism become dominant, it seems perfectly logical that a deregulated market must be superior to a regulated one, and that an integrated market still superior. 3. We should point out the context of energy liberalization in much of the developed world was quite different, in that the starting point was highly regulated private monopolies, not state monopolies. My perspective is not antideregulation, but pays closer attention to the way that industries are deregulated. There were net benefits in the United States from the breakup of AT&T and the deregulation of airlines, for example. 4. Anil Hira, Ideas and Economic Policy in Latin America: Regional, National, and Organizational Case Studies (Westport, CT: Greenwood, 1998). 5. A very interesting introduction to the crisis in the state-owned electricity enterprises is found in Helder Queiroz Pinto Junior, “Financement, investissement et mode d’organisation des industries electriques: Le cas des pays d’Amerique Latine” (Ph.D. diss., Universite Pierre Mendes-France de Grenoble, 1993). I should add my own view is that only the state could have constructed the electric industry during the middle of the twentieth century, but that the great accomplishments of the state became increasingly watered down by the increasing use of the companies for purely partisan purposes. 6. A basic introduction to the electric power industry is found in Denise Warkentin, Electric Power Industry: in Nontechnical Language (Tulsa, OK:

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PennWell, 1998) and IEA, Electricity Market Reform: An IEA Handbook (Paris: IEA, 1999). Given the dynamism of electricity sector reform, the literature becomes outdated extremely quickly. For a basic survey of different regulatory regimes internationally, see Richard J. Gilbert and Edward P. Kahn, eds., International Comparisons of Electricity Regulation (New York: Cambridge U. Press, 1996); Daniel Czamanski, Privatization and Restructuring of Electricity Provision (Westport: Praeger, 1999); M.R. Bhagavan, ed., Reforming the Power Sector in Africa (New York: Zed, 1999); and Georges Zaccour, ed., Deregulation of Electric Utilities (Boston: Kluwer, 1998). More sophisticated but readable discussions appear in Hung-po Chao and Hillard G. Huntington, eds., Designing Competitive Electricity Markets (Boston: Kluwer, 1998). Specialized technical academic journals with treatments of electricity include the International Journal of Industrial Organization, Energy Policy, The Journal of Energy and Development, and World Development. This section benefited greatly from Ron Hira’s comments and corrections. 7. Power ⳱ voltage ⳯ current. 8. Though there seem to be some locally limited concerns, particularly in the developed world, as to the location of both power plants and high-voltage lines in highly populated areas. 9. Note that electricity is therefore a very different sector than telecommunications, which has subsectors that are wireless. An interesting conversation is occurring among energy companies about the possibility of using electrical wires as conduits for home Internet access, but no clear market has emerged yet. 10. An excellent introduction to regulation, including these issues, is found in Robert Baldwin and Martin Cave, Understanding Regulation: Theory, Strategy, and Practice (New York: Oxford U. Press, 1999). 11. Most of the regulatory literature on electricity, like that on macroeconomic effects of neoliberal forms, takes the superiority of deregulation as a given and moves directly to the technical details of optimal market functioning. 12. We should also point out that we feel regulatory agencies are much more open to “capture” by interests in developing countries than in the First World. In the absence of a regulatory tradition of independent, strong institutions and stable political interests, the (new) institutional analyses typical of First World regulatory literature do not apply to these cases well, in my opinion. Also, the executive and international forces are much stronger in developing countries than in the First World. For a discussion of problems with the new institutionalist approach, see Anil Hira and Ron Hira, “The New Institutionalism: Contradictory Notions of Change,” The American Journal of Economics and Sociology 59, 2 (April 2000): 267–82. For examples of the new institutional approach to regulation, see Brian Levy and Pablo T. Spiller, Regulations, Institutions, and Commitment (New York: Cambridge U. Press, 1996); and Peter F. Cowhey and

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Matthew D. McCubbins, Structure and Policy in Japan and the United States (New York: Cambridge U. Press, 1995). An interesting application of new institutional analysis to these cases is found in Carlos Rufin, “The Political Economy of Institutional Change in the Electricity Supply Industry” (Ph.D. diss., Harvard University, 2000). For an example of similar work applied to the United States, see Roger G. Noll and Bruce M. Owen, The Political Economy of Deregulation: Interest Groups in the Regulatory Process (Washington: AEI, 1983). 13. Steven K. Vogel, Freer Markets, More Rules: Regulatory Reform in Advanced Industrial Countries (Ithaca: Cornell U. Press, 1996). 14. For example, see Guasch and Spiller 1999. An exception is found in Marjorie Griffin Cohen, “From Public Good to Private Exploitation: GATS and the Restructuring of Canadian Electrical Utilities,” Canadian-American Public Policy 48 (December 2001). 15. The development of the combined cycle natural gas turbine in the 1980s vastly reduced the economies of scale for electric power generation. 16. Vogel 1996, 10–12, makes some very important points about the timing of the international deregulation wave. These include growing recognition of the costs of regulatory control and the parallel rise of the public interest literature; technological and other sources of reduction in transactions costs; and “regulatory arbitrage,” meaning competition among different entities (national governments, states, or municipalities) for businesses through creating friendlier regulatory and tax environments. I also leave aside for the purposes of this book the issues of the democratic accountability of “deregulation,” which is another debate altogether. See Giandomenico Majone, Regulating Europe (New York: Routledge, 1996) and C.D. Foster, Privatization, Public Ownership and the Regulation of Natural Monopoly (Oxford: Blackwell, 1992), for more on this topic. 17. Though the Chilean military still insists on copper nationalization, its main source of revenue. 18. Reliability and universal service are also concerns for consumer groups, but they are much less prominent in the developing world. 19. The firm is now known as Price Waterhouse Coopers. 20. To a lesser but important extent, there are clear social network ties between personnel in international organizations, such as the World Bank, the corporate and financial sectors, and the local governments. 21. I am referring here to the basic economic literature on changes in national factors and markets resulting from reducing trade barriers. 22. There are important caveats, of course, such as the current impasse in the United States over “fast-track authority” to sign new trade agreements.

CHAPTER THREE

Evaluating Market Liberalization Electricity and Gas in the Southern Cone

BRIE F HISTO RI ES O F E L E C T R I C I T Y REGULAT I O N I N T H E S OU T H E R N C ON E There have been “three generations” of electricity reform in Latin America,1 according to most analysts.2 The first generation includes Chile (1982). The second stage includes Argentina (1989) and Bolivia (1994). The third generation includes Colombia (1994) and Brazil (1999). Each generation represents a “learning curve,” in which the supposed failures of the previous model were improved upon through substantial changes in the model. Our analysis reveals that while there may be learning curve aspects, understanding regulatory policy in the Southern Cone requires also a political economy analysis of the various countries. More importantly, we need to go beyond existing analyses to consider the political economy and regulatory implications of the “convergence” between the natural gas and electricity markets.

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Political Economy of Energy in the Southern Cone

Chile Chile was the first country in the world to liberalize its electricity sector.3 The Chilean electricity market was previously controlled by two public sector (state-owned) electric companies, Endesa and Chilectra, whose rates were set by the government using the international standard rate-of-return method. With the onset of the international oil crisis and the Allende socialist government in the early 1970s, the financial situation of the companies deteriorated quickly. After the military coup in 1973, the new set of economic advisors, “the Chicago Boys,” instilled the first set of avowedly neoliberal economic policies in the world, placing emphasis on free market solutions to public finance problems. From 1974 to 1979, the entire energy sector was restructured, culminating with the creation of the Comisio´n Nacional de Energia (CNE), a new regulatory body, in 1979.4 During the period 1974–79, utilities were allowed to adjust the price of energy in order to achieve self-finance in anticipation of future privatization. Endesa and Chilectra were decentralized and regionalized. Endesa was divided into 11 companies, including 3 generation companies (including Endesa), 5 independent distribution companies, and 3 integrated companies. Divestiture of Chilectra resulted in the creation of 1 generation company (Chilgener) and 2 distribution companies. The second stage of the restructuring took place 1979–90, when the generation and transmission parts of the industry were separated (or “vertically deintegrated”) from the distribution subsector.5 Three primary legislative actions set the standards for the new regulatory framework. The 1982 general services law sets out the key regulations for licensing, pricing, investment, quality, and safety. While distribution to small users and transmission are still considered natural monopolies, competition is allowed in generation and in supply to large users (defined as those using at least 2 MW of power). Small customers are offered regulated rates by distribution companies. Regulated prices are set by the Ministry of the Economy with help from the CNE. The distribution charge is recalculated every four years by the CNE, and is based upon providing a 10 percent real return on the replacement value of assets. Perhaps most significantly, there are no limits to vertical (across subsectors) or horizontal (market share) integration.6 Privatization began in 1986 and was largely completed by 1990. By 1990, there were only two public generation companies remaining.

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There were three mechanisms of privatization. The first was the sale of the smallest companies through public auctions. The second was the auction of share packages on the stock market for the largest companies. The third was the sale of small packages of shares in the largest companies. Thus, the percentage of privately held shares of the largest national energy company, Endesa, increased from 30 percent in December 1986 to 72 percent in 1989. Institutional investors, including pension funds, eventually held 25 percent of the stock. Workers of the utilities received 5–10 percent of the stock.7 In terms of formal decision making, there are three important players in the Chilean system. The first is the CNE, part of the Ministry of Mines, which sets out the day-to-day regulations on the electricity market and the rates to be paid to distribution companies. The second is the Secretariat de Energia y Combustibles (SEC). The SEC was created by a law decree in 1985 within the Ministry of the Economy. It is charged with the enforcement of regulations and technical standards for liquid fuels, gas, and electricity, and the ensuring of quality and security of loans secured by users of these energy sources. The third is the Ministry of the Economy, which sets the highest level of economic policy and thus ties energy policy directly to the reigning executive office. Also noteworthy is the Antitrust Commission, which deals with all industrial sectors, including energy. The National Environment Commission (CONAMA) has no authority to set policy related to energy.8 Coordination, or “system operation,” within each of the four regional transmission grids is done by the local Economic Dispatching Center (CDEC). CDEC is a supposedly autonomous entity with members of all utilities from each system designed to ensure the efficiency and security of the system. The CDECs were created in 1985 by the Ministry of Mining, and given the authority to regulate coordination of the operation of generating centers and transmission lines.9 Outside of the longterm wholesale contracts made freely between generators and large customers, electricity in the wholesale market must be purchased on the spot market. The spot market price is set hourly by the CDEC and is based on the marginal cost of production, or spot marginal cost. The CDEC ensures efficiency in price and that each generation company has enough installed capacity and can produce enough electricity to meet demand. The CDEC accomplishes the latter through an annual determination of “Firm Energy” and “Firm Capacity.”10 The Chilean Elec-

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Political Economy of Energy in the Southern Cone

tricity Law requires companies to transmit electricity on an “open access” basis in which new users may obtain access to the system by agreeing to invest to expand it. Transmission companies recover their investment in transmission assets through tolls, or “wheeling rates,” which are charged to generation companies. The toll is charged according to a formula by which the owner of the transmission lines is reimbursed for the investment and operation costs relating to the transmission lines used. The amount of the toll is open to negotiation between the transmission and the generation companies. Disputes are submitted to arbitration.11 The price distribution companies charge their regulated customers is determined by the sum of the purchase cost incurred by the distribution companies (based on the capacity and energy consumption node prices) and the value added by the distribution (VAD) network. The VAD includes energy losses and returns on investment and is recalculated every four years.12 The regulatory system has been under tremendous pressure over the last three years, precipitated by a severe drought that led to power shortages. Unlike the cases of the United Kingdom, where plants submit competitive bids, the CDEC system requires all generators to bid actual marginal costs of generation in setting the spot price. One criticism is that this formula may lead to price distortions because of the unique conditions of hydro-based generation. For example, hydroelectric plants must submit a variable cost of zero in times of low demand and plentiful rainfall, and gas-fired plants are not permitted to include the cost of fuel transportation in the calculation of their costs. Another criticism is lobbed at the models that the CNE uses for both estimation of water reservoir levels and variable costs of thermal plant generation. The CNE models counted on expectations of a 90 percent variation in terms of rainfall, but in the severe drought beginning in 1997 the rainfall fell within a 99 percent probability variation. The drought left hydroplants running at 15 percent of capacity. The CNE imposed rationing across the board, which helped hydrogenerators, who would otherwise have had to make purchases on the spot market in order to fulfill their longterm contracts. The power outages affected 80 percent of the population for two hours a day November 1998–April 1999. The situation was exacerbated by the extended outage of Colbun’s 360 MW gas-fired Nehuenco plant. As a result, spot prices soared around $140/MWh, peaking

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at $240/MWh. Thus hydro producers suffered significant losses.13 We should note the important characteristics of the two main transmission grids, the Sistema Ele´ctrico del Norte Grande (SING) in the North and the Sistema Interconectado Central (SIC) in the central region. The SING is based increasingly on thermal (gas) generation, while the SIC is highly hydro dependent. Furthermore, the SING serves mainly the large mining industries in the North, while the SIC serves the bulk of the residential population in the central valleys including Santiago. Thus, the energy crisis affected the majority of the residential customers. A general impression was formed that the electricity system was benefiting the large, wholesale customers in great disproportion to the regulated retail customers. The crisis led to a public and political backlash against the system. Public sentiment led to calls in Congress for heavy fines for the failure to produce sufficient energy. Public protests and consumers refusing to pay electric bills led President Eduardo Frei to urge severe cuts in public and government usage. Companies responded by attempting to quickly bring new diesel-fired generation on line. The political pressure resulted in a new Electricity Law, which went into effect in May 1999 and made generation companies technically liable to regulated customers during periods of rationing, despite the fact that similar provisions had been found unconstitutional by the Supreme Court in 1992. The new law also required generators to install new capacity and increased fines for nonperformance of contracts. These provisions are seen by some as biasing the energy sector away from hydro and toward other fuel-based sources of energy.14 Disputes over transmission tolls are the most frequent open area of conflict within the Chilean regulatory structure. In some cases, companies have even planned to build their own private transmission lines to reduce costs.15 The disputes originate from the fact that transmission companies can leverage their unequal position in the production process with generating companies in setting the price, and from Endesa’s strong presence in both the generation and transmission subsector. In June 1997, the National Resolutory Commission ruled against compulsory vertical disintegration of the companies controlled by Enersis, including the dominant transmission company, Transelec.16 Since that ruling, Endesa, the major shareholder of Enersis and not only the dominant player in generation and transmission, but a major market shareholder in dis-

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Political Economy of Energy in the Southern Cone

tribution, “voluntarily” sold Transelec.17 Nonetheless, the discomfort at Endesa’s dominant control of the market in the various subsectors, including ownership of a large percentage of the water rights (affecting the hydropower market) and allegations of collusion with Gener, the other major generation company, resulted in continuing informal complaints that the Chilean system is actually run as a collusive oligopoly.18 More recently, Gener has also been sold, to the U.S. company AES. Despite these improvements in the competitive landscape, there is no doubt that Endesa continues to dominate the market. Probably as a result of the hydrological crisis and the resulting financial conditions, as well as the desire to compete more effectively with Endesa, two new pipeline projects to bring gas from Northern Argentina were subsequently set up by rival private consortia.19 The development of dual projects undermines the economic viability of both and underscores the frequent lack of efficiency or logic in market outcomes. Nonetheless, the development of the pipelines will reduce Chile’s dependency on water conditions and should reduce the SING wholesale price of electricity in a few years when completed. We should note that Endesa cleverly has its own interests in one of the pipelines, so by no means will it be shut out by this new development. The pressure for regulatory reform seems to have succeeded in Chile, where a new set of electricity regulations are to be introduced in 2002. Still, industry competitors behind the scenes continue to be skeptical about the market power that Endesa continues to have, as well as the tacit collusion between Endesa and the Chilean government’s interests. The new regulations promise to turn Chile into a more efficient market along the lines of Argentina, which we now examine. Arg ent i n a Argentina’s move toward privatization came a decade after Chile’s and so incorporated many of the “lessons” from the Chilean experience.20 Argentina’s electricity had previously been managed by SOEs as in other Latin American countries. Those enterprises became increasingly inefficient in economic terms, with regular operating deficits by the 1970s. Despite various attempts to reform the companies, the country began to develop an electricity crisis. The origins of the crisis were related not only to poor management and lack of competition, but, equally as importantly,

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to an inability to invest in equipment maintenance or expansion. There were also rampant theft of electricity and poor collection of bills.21 Two major laws passed in 1989 set up the privatization. First, the Economic Emergency Law prohibited the Central Bank from financing government deficits. It also suspended all state subsidies and many incentive programs to mining and manufacturing companies. Second, the Administrative Reform Law allowed foreign investment in federal companies. In 1992, Argentina signed a Bilateral Investment Treaty that gave national treatment to U.S. firms investing there. In the same year, Public Law 24,065 established the new rules for the deregulation of the electricity sector. The new regulations set up ENRE, the national regulatory agency for electricity. In 1993, most of the remaining restrictions to foreign investment were lifted. As the three major federal electricity companies—SEGBA, Ayee, and Hidronor—were privatized, they were broken down into different companies for sale, according to the regional location of the operations and whether they involved generation, transmission, or distribution. The generating plants were furthermore sold as separate assets.22 Argentina raised $15 billion from the privatization for debt reduction. More importantly, the regular operating drain of the companies was eliminated. The privatization also resulted in the drastic reduction of the number of employees in Argentina. The number dropped from 222,000 federal employees to 42,000. Of the approximately 180,000 newly unemployed, 66,000 were expected to find work in the privatized companies and another 19,000 were expected to retire. This means that about 95,000 people were forced to find some other means of work.23 The most interesting characteristics of the deregulated Argentine system are the ways in which the regulations attempt to overcome the problems experienced in Chile. First of all, the Argentine system limits both vertical and horizontal cross-ownership. Generators cannot have interests in transmission, which is run by public concession, though they still can have interests in distribution. An aspect of the system is that no one company can control more than 10 percent of the generation market. These aspects seem to have locked in a fierce competitiveness in the generation subsector and are cited as major reasons for the dramatic reduction in electricity prices in Argentina after deregulation. Second, the Argentine transmission system is run by long-term public concession, awarded by bidding. One company, TRANSENER, has the respon-

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Political Economy of Energy in the Southern Cone

sibility for maintaining and monitoring the quality and reliability of most of the transmission system. However, the expansion of the transmission system is left up to a state fund that accumulates on the basis of regional transmission congestion.24 The expansion of transmission has been a sore point in the Argentine system, but, to be fair, it is a problem faced internationally with equal befuddlement by all privatized systems. Third, Argentina has a centralized neutral system operator. In fact, in Argentina, CAMMESA both runs the wholesale market and operates the system. CAMMESA has five different parties that help it to make decisions, based on the five major players in the electric system. The five parties who meet to vote on electricity regulations are: the Secretary of Energy; AGEERA, the association of generators; AGUEERA, the association of large electricity users; ADEERA, the association of distributors; and ATEERA, the association of transmission agents. While in theory each of these parties has an equal vote, the Secretary of Energy has a disproportionate weight and ultimate proposal and veto power. Unlike Chile, Argentina is a natural-gas dominant system, so that the level of rainfall has not affected the system. On the whole, the Argentine system, and particularly CAMMESA, has been an unquestionable success in terms of developing a competitive market. While former President Menem and indeed many individuals of the Argentine privatizations across sectors, were linked to corruption, privatization is a onetime affair. The major grumbling among the players in the electricity system outside of the aforementioned transmission expansion problem seems to be centered on the much lower-than-expected price levels of electricity in the spot market. This has led to reasonable fears that a lack of investment in future generation capacity will lead to much higher prices in the future. The energy surplus in Argentina has also speeded the movement toward energy integration, since exports to Brazil will improve local rates of return. Probably the most interesting feature of the Argentine market is the dominance of a former state company, YPF, in natural gas production.25 YPF recently merged with Spanish company Repsol, creating an even more formidable corporate giant in the Argentine hydrocarbons market. Natural gas is now by far the most important power generation fuel supply source, so YPF has very strong indirect influence on the electricity market. Interviews with seasoned players in the market reveal that despite being privatized, YPF continues to have a cozy relationship with

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the Argentine government. It is interesting to note, furthermore, that YPF and Petrobras, the Brazilian state oil and gas company, who are potential regional competitors, reached cooperative agreements recently, including on the trading of assets. Brazil It is difficult to say much about Brazil’s current electricity system since it is very much a work in progress.26 However, the potential for Brazil’s electricity development seems to be enormous. Not only is Brazil now the world’s 10th largest economy, but various sources place expected growth in energy demand at around 5 percent per year. Therefore, approximately $4.3 billion per year is required, primarily in developing new thermopower generation. The government hopes to increase the level of thermogeneration from 3,200 MW in 1998 to about 20,000 MW in 2008. The government is hoping to raise this investment within the next decade, with the Banco Nacional do Desarrollo, or National Bank of Development (BNDES), providing approximately 35 percent of the financing.27 These facts, along with the inability of the federal government to raise enough money to make the necessary investments in the expansion of generation, led Brazilian policymakers to embrace the liberalization process in the 1990s in expectation of serious (and continuing) shortfalls of electricity.28 It is important to note that Brazil’s electricity system derives more than 90 percent from hydrosources, which make the operation of a competitive market more complex. Hydrosystems also suffer from seasonal price volatility, as rainfall can vary quite substantially from one year to another. Hydro-based power, while renewable, faces other unique obstacles. To create large dam projects, large areas must be flooded, which often creates strong environmental opposition, as well as high costs for the displacement of people. More importantly, hydroprojects are enormous undertakings, requiring vast amounts of capital investment as well as technical planning. Thus, the development of the combined cycle turbine in addition to these problems has led Brazil to develop a thermal-generation development plan for its energy needs for the immediate future. As in other countries in the region, the debt crisis of the 1980s hit Brazil’s SOEs hard in terms of their ability to reinvest and expand the

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electrical system. Therefore, part of a 1986 Plan de Recuperacio´n Sectorial (Plan for Sectoral Recovery) included reforms in the electricity sector. These early reforms looked to change the way that prices were set, to increase the levels of investment, to expand the interconnections between the domestic systems, and to open small projects up to private investment. The 1991 Program Nacional de Desestatizaca˜o (National Privatization Program) was set up to begin the process of selling government assets in the telecommunications, energy, transportation, and mining sectors and to promote private sector involvement in other sectors, such as banking. The 1993 Concessions Law furthered these efforts by eliminating the uniform national tariff and guaranteeding the rateof-return systems; deintegrating the generation, transmission, and distribution subsectors; and mandating that bulk energy supply be contracted out for generators and distributors. The law also guarantees open access to transmission. The 1995 Electricity Services Law allows large consumers to contract directly with generators. This series of reforms was crucial in setting the groundwork up for the restructure of the price system, which had included heavy cross-subsidization. The primary recipient of subsidies was the underdeveloped Northern and Northeastern regions of the country.29 The liberalization process in Brazil began in earnest in the early 1990s, with a study the government commissioned Coopers and Lybrand to plan a privatized energy market.30 The report was completed in July 1997, but parts of the plan, including the privatization process, have been held up the by the macroeconomic currency crisis, which culminated in the massive devaluation of 1999. Nonetheless, limited privatizations in generation and large-scale privatizations in distribution have already been carried out. Eletrobra´s, the former state electric monopoly, has been divided into three regional subsidiaries. Eletronorte controls the Northern region, including the Amazon; Chesf, the Northeast; and Furnas, the Southeast with most of the population and industry base. Eletrosul, the regional subsidiary for the South region, was split into Eletrosul, with transmission assets, and Gerasul, with generation assets. Gerasul was successfully privatized in 1998. Nonetheless, the holding company of Eletrobra´s will continue to play a major role in the market, since it also controls 50 percent of the Itaipu dam (with the government of Paraguay), which provides approximately 10 percent of the annual electricity that Brazil needs. These companies generate about 50 percent

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of the electricity, while another 40 percent is generated by the most important state companies, including CESP, Cemig, Copel, and CEEE. Part of CESP’s generating assets have been sold. In terms of transmission, state companies control 68 percent of the lines, while federal companies control 32 percent. Almost half of the transmission lines are located in the Southeast region.31 The government created Agencia Nacional de Energia Ele´trica (ANEEL) in 1997 as the new regulatory agency to oversee the electrical system and set day-to-day policy. The Operadora Nacional del Sistema (ONS) is the dispatch operator, and Agente Administrador do Mercado Atacadı´stade Energı´a Ele´trica (ASMAE) is the wholesale market operator. Brazil has formal rules limiting vertical and horizontal integration.32 As in the case of Chile, the levels of hydrological reserves will have to be calculated in order to set the appropriate market price for energy. There are plans for transmission to be operated as a public concession, but for now the government continues to control it. The government may be reluctant to immediately give up control of transmission, as a blackout related to transmission problems occurred in early 2002 and large investments are still needed in the Northeast and to complete the link between the southern and northern grids. Brazil has now privatized 80 percent of the distribution system. An interesting but short-term issue in distribution is that the initial contracts between generators and distributors were set at below present market costs, since ANEEL expects the price of electricity to drop. These contracts end in 2007. Brazil has also moved to privatize some generation capacity. As it stands, while the government has plans for large increases in the number of thermal plants, dispatch preference will be given to hydro plants. Since the details on dispatch rules are not yet clear, the actual market price of electricity remains unknown.33 The transmission will be run as a public concession contract, though there will be at least four contractors for each major transmission grid. A government committee, the Comı´teˆ Coorde´nador do Planejamento da Expensa˜o dos Sistemas Ele´tricos (CCPE) will plan and approve expansion of the transmission lines. For the moment, Eletrobra´s controls most of the national transmission grid, while several of the state companies control the grids in their areas. At the moment, only large users (over 3 MW) will be allowed to participate in the wholesale market through ASMAE, but there are plans to allow full customer choice at all levels by 2005.

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Political Economy of Energy in the Southern Cone

Perhaps the most interesting feature of the liberalization program is that the privatization preceded the deregulation process. As a result, one issue is there has been much valid criticism that the privatized utilities were sold well below their potential market value. A second issue is the extent of the privatization itself. Eletrobra´s and other government companies will continue to maintain large shares of the generation subsector. A third national issue concerns whether the relatively impoverished Northeast and Amazonas are commercially viable enough to create a competitive private electricity market. In the case of the former, it is a region presently dominated by residential consumers and therefore considerably less attractive to investors, though the rate of industrial growth is supposedly growing from a small base. In the case of the latter, the Amazon region is one of sparse populations spread out over extremely inhospitable jungle terrain. Thus, much of this region will probably never be connected to a national transmission grid. The questions about these two regions bring up a policy question about mechanisms for possible cross-subsidization of these regions that has yet to be resolved or openly debated. For the moment, the privatization process has been disappointing in Brazil,34 but the lack of clear investment rules and procedures is the main and remediable cause. However, the lack of decisive action might also point to divisions within the government about how to proceed in the regulatory process. Petrobras continues to dominate the petroleum and natural gas markets. In fact, Petrobras has important stakes in the newly discovered Bolivian oil acquisitions, which we discuss further in the section on Bolivia. Petrobras still controls natural gas transmission in Brazil and has allowed only limited foreign participation in the petroleum sector. The lack of clear regulations and, perhaps, fears about the continuing role of Eletrobra´s and Petrobras in domestic energy markets have led most recently to rolling blackouts and “voluntary” pressures to reduce energy usage. The shortfall in the expected investment in gas generation is telling of the nervousness that foreign investors have toward the Brazilian market, in spite of its tremendous potential.35 The urgent need for increasing the supply of energy will undoubtedly lead to new concessions on the part of the government to improve the investment climate as well as pushes toward integration of energy supplies and electricity transmission from Brazil’s neighbors, the remainder of which we now examine.

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BRIE F SKET CHES O F T H E E L E C T R I C I T Y S Y ST E M S IN BOLIVIA, PARA G U AY, A N D U R U G U AY Boliv ia As mentioned above, Bolivia is one of the important resource suppliers to Brazil in the region. Recent discoveries now rank Bolivia as second only to Venezuela in terms of natural gas reserves in the continent. Since the domestic market is limited, these resources have become an important export source. The foremost vehicle for gas exports is the Bolivia-Brazil (Transredes) pipeline, which was completed in July 1999 by a private consortium whose major partners include El Paso, Shell, Enron, British Gas, BHP, and Transredes. Petrobras provided much of the financing for the project.36 The pipeline is over 1,400 miles long and serves Sa˜o Paulo, Brazil, with plans to extend it all the way to Poˆrto Alegre. The pipeline is not yet working at full capacity, because of the slowdown in Brazil’s economy and thermal plant construction due to the real devaluation. However, a second pipeline is being discussed, as is a separate pipeline to be built by Petrobras to its own Bolivian gas fields. Bolivia is also promoting investment in hydrogeneration, which it estimates at a potential 38,900 MW, mostly in the Amazon region near Brazil. This power would also be used to earn more export revenues from Brazil.37 There are also serious talks about generating electricity in Bolivia and exporting it via transmission wires to Brazil, but there seem to be doubts about the possibilities of creating the necessary infrastructure.38 The first contemporary legislation in Bolivia on electricity was Supreme Decree No. 5,997, passed on February 9, 1962. The decree placed the electricity industry within the Ministry of Energy and Hydrocarbons (MEH) and created the Direccio´n Nacional de Electricidad (DINE) to plan and regulate the industry. Decree No. 5,999, passed on the same day, created the Consejo Nacional de Electricidad (CONDE) to propose plans for the future expansion of electricity to the National Counsel for the Electric Industry (part of the National Counsel for Development) and the Empresa Nacional de Electricidad (ENDE) as the state-owned utility. ENDE was responsible for generation and transmission except in the cities of La Paz and Ouro, where concessions were granted. Regional power companies managed the distribution. The next major law was Supreme Decree No. 8,438, which created the Codigo de Electricidad,

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that confirmed the responsibility of the MEH and DINE as outlined above and set up mechanisms for rate setting, licensing, and concessions.39 There were a number of problems that increased over time in the Bolivian electrical system. First, DINE inherited a system in which electric companies could pass on all costs to customers and were guaranteed a 9 percent return on assets. DINE set its prices in consideration of the expenses of businesses, who therefore had little incentive to reduce energy costs. Second, electric companies never declared profits above the 9 percent rate, which was continued, even though they may have earned more. Third, and much more damaging, was the lack of clear jurisdiction over the industry. The bureaucratic wing of the MEH-DINE-ENDE competed with the National Counsel for Development (CONDE) for control of the industry. Even more confusing was that, according to a new Law of Municipalities, municipal governments were granted local jurisdiction over electricity, but DINE still asserted control over tariffs.40 The overhaul of the electricity industry was part of the sweeping 1994 Capitalization Law, which cemented the liberalization process in Bolivia by declaring the intention to privatize the main state holdings. Law No. 1,606, the Electricity Law, and the Law of the Sectoral Regulatory System (SIRESE) set up the new regulations of the industry. The National Interconnected System was established to include the major Bolivian systems. SIRESE became the name of the new regulatory agency to regulate all infrastructure industries, including telecommunications, electricity, hydrocarbons, and transportation. The new electricity rates are based on marginal costs of producers. There are also explicit statements calling for the protection of consumers and antimonopoly provisions.41 In terms of national electrical generation, Bolivia presently has a fuel mix of approximately 54 percent hydro and 43 percent thermal consumption. The national electric company, ENDE, was divided into generation, transmission, and distribution companies by the 1994 privatization program as well. The program allowed for 50 percent private ownership of the new companies, and primarily U.S. firms bought these shares in 1995.42 Distribution was divided into five different companies, and transmission was transformed into a regulated monopoly, run by a foreign firm. Eighty percent of Bolivia is rural and remains without access to electricity.43 Bolivia has some interesting and unique aspects to its regulatory structure. No generator can own assets in either

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transmission or distribution, and generators are limited to a maximum of 35 percent market share. Despite the fact that many of the state companies were transformed into mixed enterprises, purely private companies can and do compete in the market. Bolivia also has a combined wholesale market and system operator in the independent government entity Comite Nacional de Despacho de Cargas (CNDC).44 Pa raguay The case of Paraguay’s electricity sector is easy to describe. Administracio´n Nacional de Electricidad (ANDE), the state-owned monopoly, has administered all aspects of the electricity market in the country since its inception in 1964. Paraguay is fortunate to have all of its needs met by electricity from the binational Itaipu dam with Brazil. In fact, Paraguay earns huge revenues from its exports of electricity to Brazil, which reached U.S. $240 million in 1998. Brazilian power in the Furnas and Eletrosul companies has been subsidized by Itaipu power. An additional 2,700 MW units are being built to increase Itaipu’s capacity in 2003 and 2004. Paraguay also shares the Yacyreta hydroelectric project with Argentina. Yacyreta has suffered long delays and management problems and is at only 60 percent of capacity at present, though further construction is planned. There are problems with raising capital for further construction, and the World Bank has stated its opposition to raising the water level because of environmental concerns. A third dam, Corpus Cristi, is planned on the Parana´ River, again with Argentina.45 Since electricity is such an important revenue source, and since the sector’s earnings come from large binational projects, it is unlikely that the Paraguayan government will privatize its energy market.46 Urug u ay The energy sector of Uruguay is dominated by the SOE Admininistracion Nacional de Usinas y Trasmisiones Electricas (UTE), which has a monopoly in the country’s transmission and distribution networks and generates part of the electricity. UTE was created by law on October 21, 1912, as an integrated state enterprise to create electricity in Uruguay. UTE responds to policy directions made by the Ministerio de Industria, Energia y Mineria (MIEM), and, more specifically, the Direccio´n Na-

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cional de Energia (DNE). The DNE seems to have exercised little direct influence until recently, leaving the UTE to its own devices.47 Uruguay presently imports half of its total energy in the form of imported oil. Uruguay is unusual in Latin America in that it relies upon fuelwood for another 20 percent of its energy consumption. In terms of electricity generation, Uruguay relies heavily upon its hydroelectric sources, which supply 70 percent of its electricity. There are four dams that provide the electricity—Terra, Baygorria, Constitucion, and Salto Grande. The last is a binational project with Argentina and provides 945 MW. The other 30 percent of generation is produced by thermal sources, including oil, diesel, coal, and fuelwood. There are also plans to increase the use of natural gas. A natural gas pipeline from Entre Rios in Argentina to Paysandu´ in Western Uruguay began pumping natural gas in late 1998. There are plans to develop natural gas power plants to take advantage of this new supply. Construction on a second pipeline from Buenos Aires, Argentina, to Montevideo, Uruguay, began in mid-1999. A third pipeline is being planned to pump gas from Punta Lara, Argentina, to Poˆrto Alegre, Brazil, but would cross through Uruguay, where some of the gas would be sold. The third project is expected to begin pumping gas in 2002.48 The debate about electricity in Uruguay is an exciting component about the national discourse concerning liberalization in general. In June 1997, the Uruguayan Parliament allowed for private generation and marketing of electricity, reducing for the first time state control of the sector. UTE retains the option, however, of taking up to a 40 percent stake in any private power plant. While transmission and distribution will remain monopolies, there are plans to increase private investment in upgrading these subsectors. The Parliament also created the Electrical Market Administration (ADME) to control the wholesale electricity market. ADME will negotiate with UTE about the distribution of electricity and may even purchase distribution facilities from UTE. ADME will be able to collect a maximum 2.5 percent tax on distributed energy.49 The general sentiment is strongly against privatization of the national utilities. Uruguayans rejected further privatization of the sector in a referendum of June 1998. The argument is that the national utilities are earning important national revenues and providing services on a par with privatized companies. Perhaps more important is the general sentiment, rooted in historical experience, against foreign domination of

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the economy and the strong desire to retain the high-paying jobs that the UTE provides. Uruguay is highly unionized, and the bloated civil sector is quite vocal, so that privatization of UTE seems quite unlikely.

A BRIEF O VERVI EW OF T H E N AT U R A L GAS R EGULAT O RY S Y S T E M S I N T H E SOUTHERN CO NE Since natural gas is a network business, like telecommunications and electricity, for the sake of brevity we will not complete a similar descriptive review as we have for electricity.50 Instead, it is important to focus on significant differences between gas and electricity regulations and how they may impact outcomes of the energy market. As I discuss in chapter 1, there is a strong movement toward convergence between the gas and electricity markets, as gas is increasingly used for power generation. Therefore, as the links between the two markets grow stronger, regulatory and market aspects of the upstream gas market will have increasingly important effects on the dynamics and outcomes of electricity markets. In general, the level of development of gas regulations reflects two factors in the Southern Cone: the present level of dependency on gas and the overall level of regulatory complexity of the electricity sector. Since Argentina has the most developed regulations for gas, we focus on this case. ENARGAS is the independent regulatory agency that oversees the natural gas market in Argentina. Two large pipeline companies, Transportadora del Gas del Sur y del Norte, respectively (TGS and TGN), control the transmission pipelines. Both are private companies, which of course raises problems of whether access is really open. In general, the Argentine gas sector is considered a great success, since gas prices have steadily declined over the last decade, savings that have spilled over into the electricity system. However, a proper assessment would have to look at whether the decline in gas prices is accompanied by stability in prices, and, more importantly, whether prices actually declined as much as they would have if there were a truly competitive upstream market and a clearly open pipeline access. Of course, any answer to such a question would be largely speculative, especially given the large new findings of gas, but what we can say is that the declines in Argentine

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gas prices are not clearly reflective of perfect market conditions or competition. We should note that there is an important difference between the gas and electricity markets. Perhaps the most important part of the natural gas market involves highly risky “upstream” activities, including exploration and development of new fields. The risk, technology, and heavy capital expense to develop new fields is another argument that is used in the Southern Cone, particularly Brazil, against complete privatization of the gas market. Moreover, a similar problem can arise in a privatized market as we saw in Chile regarding water rights. That is, if an incumbent company is able to dominate ownership rights over the more promising fields, it may actually be in the company’s interests to restrict supply and otherwise reduce new gas development activities in order to drive up the price. As we have seen in the case of YPF in Argentina, even exemplary regulatory policy may not resolve these kinds of market issues. Moreover, as is the case with Endesa and the CDECs in Chile’s electricity dispatch system, the control over gas pipelines by YPF has led to allegations by competitors that it informally restricts or distorts competitive access to transmission of gas. That the U.S. El Paso company has plans to develop its own pipeline transmission network from Southern Argentina speaks directly to this problem. An argument can therefore be made that, on the contrary, it is strongly in the national interest to create regulatory incentives not only to promote competitive access to gas pipelines, but also to reduce or ameliorate the risk and expense involved in developing new gas fields. E VAL UATI O N O F S o C o E L E C T R I C I T Y M A R K E T S E mpiri cal Eval u ati o n Pointing out the differences among the SoCo markets leads us naturally to ponder how those differences play out in terms of market outcomes. We can propose some obvious beginning measures by which we can evaluate the SoCo markets: a. market concentration: level of competition, barriers to entry b. investment in sector c. universality of service

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d. quality of service e. transparency of operations f. prices g. budgetary effects h. differentiation of effects among different groups

Unfortunately, there are few clear indices for most of these measures, with the exception of prices. However, through observation of market conditions, interviews of market participants, and readings of primary and secondary analyses,51 we can give a rough qualitative category to the market conditions in each country. We summarize our evaluation for criteria 1–5 in Table 3.1. This table shows that the remaining state-owned systems (Paraguay and Uruguay) and the long-term (Argentina and Chile) and recently (Bolivia and Brazil) liberalized markets demonstrate great variety in market conditions. Without a doubt, however, privatized systems show higher levels of investment and quality of service than the crisis-ridden state-owned systems that they replaced. However, we should note there is growing concern that privatization brings initially higher levels of investment but that long-term investment is considerably lower than needed. This is particularly a problem in transmission.52 Unfortunately, there is no reliable source of market share data. Nonetheless, Table 3.2 shows there are legitimate concerns that electricity and gas systems are highly concentrated in the privatized systems of the Southern Cone. OLADE, the regional commission for energy based in Ecuador, also compiles price statistics for the Latin American markets. Table 3.3 summarizes our price information. We need to be quite careful about interpreting price information. We are talking about two different systems—the state and the private systems—with different dynamics. The state system includes major crosssubsidization of industries, regions, and other types of consumers, so that prices are likely distorted. They probably had some government subsidies of the system as well as some subsidy-producing elements. SOEs were also notorious for padding employment, but that employment itself was a form of middle-class welfare, not to be discounted as completely valueless.53 Unfortunately, there is almost no documentary

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Table 3.1 Summary Evaluation of SoCo Electricity Systems

A variety of market concentration measures are used, but remember this is a dynamic situation. There are no consistent data sets on these conditions. b This can be measured by increases in generation capacity and amount of new equipment, plants, etc. Argentina experienced a boom initially after privatization, but now has a shortfall in new investment. The opposite volatility occurred in Chile. After the initial postprivatization boom, new investment was stagnant until just this year when the new regulations were announced. There are no good historical data for investments in capacity and, in any case, they would have to be matched in a consistent series with demand growth, which is also not available. c I have found no consistent data on either universality or quality of service for Latin America. Universal service in high countries was already achieved under the state systems. Quality of service categorization is based on disparate data and interviews. This may be imprecise, but, unfortunately I have found nothing better. a

data on the financial workings of the state-owned period. We also must consider that inflation rates, even currencies, have changed over the period. Since fuel supplies markets differ over time (e.g., the price of oil) and by country, the base price of energy production is subject to change.54 Last but not least, the major reason for the crisis was the huge increase in demand among Latin American countries, which might have raised the state system’s prices even more than current privatized ones. Therefore, we should not equate efficiency (production at marginal cost) with price, and efficiency is not the only evaluative criterion.55 None-

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Table 3.2 Examples of Market Share Concentration in SoCo Energy Markets

Source: EIA. Note: If we took a broader survey, we would see that the problem is compounded by numerous cross-ownership situations between dominant generators and distributors.

theless, we are still curious to know what the bottom line is for consumers. After all, as we have seen, the bottom line for the politics of energy deregulation is linked more than anything else to the perception of the wholesale customers of energy. As we have seen, when there are severe drought conditions, such as those in Chile in 1998–99, even where market efficiency dictates otherwise, significantly higher prices always result in major political pressures for reform. Like other collective action problems in politics, there is always coalitional pressure resulting from (perceived) sharp negative changes and rarely pressure for positive, long-term change. Table 3.3a and Table 3.3b show us that overall average prices were actually lower, approximately half as much, under state-run systems— for Argentina, Bolivia, and Chile—than under privatized systems. If we use standard deviation as a measure of the volatility of prices, we find surprisingly that volatility appears to be lower under privatized systems.

Table 3.3a Comparative Electricity Prices for SoCo Countries Wholesale Prices, Year of Privatization Marked with *

Ave. ⳱ average SD ⳱ standard deviation Source: Data for Table 3.3 purchased from OLADE in 2001; customized and analyzed by the author. My understanding is that prices are real.

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Table 3.3b Comparative Electricity Prices for SoCo Countries Retail Prices, Year of Privatization Marked with *

We also certainly want to know how different groups in society are affected by the privatization of the electricity system. Table 3.3c shows us partly what we already know—that retail customers always pay more than wholesale customers, as they should by definition.56 The overall premium of that difference has increased over time in every country, with the exception of Paraguay. However, in each of the privatized cases, namely Argentina, Bolivia, and Chile, the premium

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Political Economy of Energy in the Southern Cone

Table 3.3c Comparative Electricity Prices for SoCo Countries Retail Price Premiums (How Much More Do Retail Customers Pay Than Wholesale Customers?), Year of Privatization Marked with *

retail customers pay has increased substantially under the privatized system. The higher price paid by residential customers after privatization could stem from higher prices and/or the loss of cross-subsidization. Regardless of the source, we can therefore conclude that wholesale customers, generally industries, enjoy greater benefits than retail customers.

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This reinforces the point that privatization and deregulation have important distributional consequences, especially if we consider the large percentage of the population engaged in the informal or marginal economy. This brings us to answering the question of why there seems to be widespread support for electricity privatization when prices have risen. Undoubtedly, the major effect of liberalization is to improve the status of the government budget, thus improving the overall investment climate and so private industry. If we add the windfall of privatization that could be used as a means of reducing the national external debt, then liberalization will be strongly supported by the state. In the context of a strong desconfianza (or strong skepticism, doubt) about the state by almost everyone in Latin America, and the urgency of attracting foreign capital to provide for new energy exploitation, liberalization seems to be clearly positive at face value. However, this conclusion depends secondarily upon two additional factors. First, it depends on how well run the state-owned company is; the contrast between poor and well-run operations is illustrated by the comparison of SEGBA in Argentina and UTE in Uruguay. Second, it depends, as we have seen from the above analysis, on how well run the private market itself is; the contrast here between Chile, a poorly run market, and Argentina is important. Third, our analysis shows us that the distributional effects of deregulation vary from one group to another, depending on how the market is set up. In the case of Chile, we have seen that industrial customers enjoy a competitive market, while retail customers have had neither choice nor market power. Furthermore, while Northern Chile enjoys competition among gas supplies, Santiago is dominated by a few suppliers. Finally, new energy producers find entry into the market difficult, while established companies and their constituencies are pleased with the status quo.

CON CLUSIO N Te chnical Issu es The problems of the Chilean model, namely, excessive market power, vertical integration, and lack of a truly independent system operator and transmission system, were addressed by Argentina. The difference between Argentina and the third-generation reformers lies primarily in the

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way that the spot (wholesale) price is set. Argentina, like Chile, sets its price on the basis of marginal cost calculations. Such calculations are prone to misestimation, especially in terms of the models that must be used to generate hydroelectric power costs. Colombia and (prospectively) Brazil try to get around this problem by allowing suppliers to compete directly for demand. Thus, prices in the third-generation reformers are free to float. While this sounds good in theory, in practice it may allow for colluding suppliers to manipulate the price in favorable terms. For instance, at the onset of drought conditions, gas generators may reduce the energy they produce in anticipation of higher prices later. But this tactic may work only if other generators do not step forward to take up their market share and then hold on to it. So, there are strong incentives for supplier collusion, and, to a lesser extent, buyer collusion in a market-based price system. We see a parallel problem in terms of YPF’s and Petrobras’s strongholds in the Argentine and Brazilian hydrocarbons markets respectively. In terms of transmission, there is an international discussion about how to incentivize new investments in capacity. In developing countries and particularly in the vast reaches of the Southern Cone, there are significant stretches that still do not enjoy basic energy infrastructure. Moreover, we have seen time and again that the dominant market players find ways, formally or informally, to restrict third-party access. There is talk about setting up secondary markets in transmission capacity (i.e., allowing for the sale of transmission rights in both electricity and gas), but so far these preliminary schemes remain extremely problematic. Under a privatized system, only a strongly independent public systems operator, such as CAMMESA with its transparent contract information, seems to have minimized dispatch problems. Certainly, the “pool” system of dispatch with transparent contracts (a` la Argentina) seems to work eminently better than the bilateral contract system (e.g., Chile) in developing markets. However, even Argentina has not solved the problem of transmission pricing in a way that both reflects the value of a particular transaction and creates enough funding for new infrastructure development. The bottom line is that rural transmission capacity may be in the national interest, but it is not profitable or in the private sector’s interests. Anticipating the argument that the infrastructure should not be built if it is not economically viable ignores important externalities of energy infrastructure. The problem is similar to one in regard to

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upstream gas activities. That is, the risk and payoff for developing new infrastructure may be high and long-term. Developing whole new regions can have all kinds of “public goods” benefits, such as reducing urban concentration, opening up new local resources to development, reducing regional and rural poverty, and in the end providing the basic infrastructure upon which a viable private market relies. The conclusion must be that a careful assessment should be made if the extra public investment is worthwhile. As it stands, that assessment is being neglected to the detriment of medium- and long-term benefits for the companies and the public alike. Another basic problem lies in the way that distribution is managed. Since distribution is still treated as a monopoly, there are various mechanisms for attempting to ensure coverage, quality, and efficiency. In general, countries offer limited contracts in terms of coverage for a regional area and allow prospective distribution companies to bid for them. The utility commissions then ensure coverage and basic quality. They have occasional “rate adjustment” reviews every few years, in which they set an increasing standard for efficiency and quality that distribution companies must meet. If the distribution company exceeds those standards for efficiency, it can keep the savings for itself. So, the key in this political economy game is how reasonable cost rates are set. In many cases, particularly Chile, there have been claims by the public that the rates set for distribution companies have been so generous as to lead to extreme levels of profit.57 The pat answer for competitiveness in distribution is to steadily reduce the usage threshold by which consumers can participate in the wholesale market, a policy adopted by both Argentina and Brazil in electricity and gas. However, in these countries as well as in other markets, such as California, the fact is that in practice little consumer choice has been achieved. There are a variety of reasons for this problem, including that there really is only one set of lines or pipes to each house or small business, and that the margins of profit are too low to attract strong competition. Moreover, particularly in developing countries, the costs of precise metering are still too high to allow for individual usage monitoring, which is unfortunate from the point of view of energy efficiency and competition. It may be that a handful of customers would be willing to pay a premium for green energy, for example, but it is likely that they would be dispersed over a wide area, thus leading to extremely complex billing, metering, dispatching, and

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maintenance issues. As a result, strong public monitoring and short concessionary periods are needed in order to manage a deregulated distribution system in the public and consumer interest. Moreover, strong public regulation would be needed to achieve goals like increasing the viability and usage of environmentally more friendly green energy. A particularly important and underestimated issue is how to develop a well-functioning price system, which considers the very low marginal costs but high volatility of hydropower versus the higher but more stable costs of thermal generation. In fact, Brazil’s energy crisis over the last two years is directly related to its inability to solve this impasse. As a result, the Brazilian government has steadily increased intervention in the gas market to improve incentives for investors to enter into gas generation.58 Whether we are for or against neoliberalism, including free markets, it is here to stay, as long as Latin America is highly dependent on external capital. This chapter demonstrates that the state-owned versus marketoperated dichotomy is a very ambiguous approximation of reality, at best. The reality is that there are positives and negatives in both state-run and privatized systems. The key is how the SOEs are run and how the private markets are regulated.59 Politi cal Econ o m y I s s u e s On a more general level, our comparison of state-run and privatized systems has shown the differences are not as clear-cut as either the proor anti-privatization forces would have us believe. Though there does seem to be a net improvement in service, it is unclear exactly how much, if any, real gains in terms of prices have been made by privatization, particularly on the retail level. Indeed, there is some evidence that the benefits of privatization are likely to be extremely inequitably distributed, along the lines of producing versus nonproducing and high- and low-level consumers among regions, companies, and states. While we acknowledge that the extreme macroeconomic duress and need for private capital for new investment to meet explosive demand probably prevent any possibility of reversing privatization, states must adjust their domestic markets to deal with these problems. Furthermore, we have seen that differences in regulatory structures lead to very important differences in market functioning and market

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outcomes, so regulatory policy can be a state’s primary tool for shaping markets. Our case studies back up our general conclusion that SoCo states have a significant degree of autonomy from both international and domestic forces through their regulatory policy. Chile is able to fend off domination of its domestic market by foreign investors, while at the same time to crack down on Endesa when state purposes change. Argentina is able to create ultracompetitive conditions for foreign investors in electricity, while maintaining a close tie to the gas market. Brazil is attempting to create a competitive domestic market in which its state companies have a favored hand. Paraguay and Uruguay show no signs of buckling into neoliberal pressures by privatizing. Bolivia is the one case where the long-term strategy and degree of autonomy is unclear. However, we could charitably cast Bolivia’s strategy as garnering in the huge up front investment needed to exploit the newly discovered gas fields. Only an alliance with foreign investors will allow for that. The key question is what Bolivia (like its neighbor, Ecuador, in regard to petroleum) will do with this windfall. None of the states show any real pressure from a domestic bourgeoisie; instead, what we see is the possibility of an alliance between the dominant partner in the state and national champions (whether state-owned or favored) that could help to counterbalance the strong dependency on foreign investment and technology. Ultimately, the reregulation game is a mixed bag, with its strengths and weaknesses, subject to a learning curve and local context, as much as the SOE was and still is in a few places. The war of words between neoliberals and their enemies is full of bluster on both sides. The rhetoric of the pro-market forces would have us nonsensically believe that any decline in prices shows the “superiority of markets” and that any increase in prices is due to state intervention. Ironically it is large state or former state monopolies, including Electricite´ de France (EdF), Endesa, Petrobras, YPF, Tractebel, and others, who are dominating the private market. Thus, we are talking about an oligopolistic situation, in which the competitors are receiving substantial industrial policy support (including the private U.S. and European companies) from their state sponsors in order to gain market share. If we looked at domestic markets, we would see that these same U.S. and European states use their domestic markets, antidumping provisions, key tax breaks, and a variety of other tools as buttresses for the international campaign to conquer markets. Thus, the Latin American state needs to adopt a new type of strategy, one that

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goes well beyond the present vision or capacity, to counteract the historical advantages of the developed countries’ favoritism, as in the case of France and EdF. We have demonstrated, in sum, that in both the electricity and gas markets there is no such thing as a free market and that state intervention is actually needed to create competitive conditions and positive externalities, including long-term investments and environmental protection, which in the end allow markets to function in the public and national interests. As Polanyi pointed out in The Great Transformation many years ago, markets, even ones in a neoliberal era, are complex phenomena embedded in (local) social and political customs and purposes. The key to understanding electricity, like other markets, then, is to gain a deeper understanding of the local context, particularly state autonomy from foreign and domestic interest groups, and the national plans for development.

NOTE S 1. See also EIA Web site for synopses of country markets; USITC, “Electric Power Services: Recent Reforms in Selected Foreign Markets,” Investigation No. 332–411 (USITC: Washington, November 2000); and “Natural Gas Services: Recent Reforms in Selected Markets,” Investigation No. 332–426; USITC Publication 3458 (October 2001); IDB, Profiles of Power Sector Reforms in Selected Latin American and Caribbean Countries (Washington: IDB, 1999); and CIER, 25 Anos (Montevideo: CIER, 1989); Pablo T. Spiller and Luis Viana Martorell, “How Should It Be Done? Electricity Regulation in Argentina, Brazil, Uruguay, and Chile,” in International Comparisons of Electricity Regulation, eds. Richard J. Gilbert and Edward P. Kahn, (New York: Cambridge U. Press, 1996), 112–117; Antonio Estache and Martin Rodriguez-Pardina, “Light and Lightning at the End of the Public Tunnel: The Reform of the Electricity Sector in the Southern Cone,” draft paper (Washington: World Bank, 1998); C. Federico Basanes, Eduardo Saavedra, and Raimundo Soto, “Post-Privatization Renegotiation and Disputes in Chile,” working paper (Washington: IDB, September 1999); Alejandro Diaz-Bautista, “Review of Restructuring Chilean Electric and Gas Industries: From Monopolies to Competition,” found at http://www.orion.oac.uci.edu (n.d.). Retrieved March 3, 2000; Ronald Fischer and Pablo Serra, “Regulating the Electricity Sector in Latin America,” Economia (Fall 2000): 155–218; Felipe G. Morande and Ricardo Raineri B., eds., (De)regulation and Competition: The Electric Industry in Chile (Santiago: ILADES, 1997); Luigi Manzetti, Regulatory Policy in Latin America: Post-Privatization Realities (Miami: North-South Center, 2000);

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Carlos Rufin, “Institutional Change in the Electricity Industry: A Comparison of Four Latin American Cases,” (n.d.); and “The Political Economy of Institutional Change in the Electricity Supply Industry” (Ph.D. diss., Harvard University, May 2000). 2. Fischer and Serra 2000. 3. We should note at the outset that the Chilean regulatory structure is in the process of renewal. We spend it a bit more time on Chile because it is the pioneering and longest-lasting case of privatization in the world. 4. Spiller and Martorell 1996, 112–17. 5. Estache and Rodriguez-Pardina 1998, 2–3; and Basanes, Saavedra, and Soto 1999, 3–4. 6. Sananes, Saavedra, and Soto 1999, 3–4. 7. Ibid., 3–4. 8. Ibid., 4–5. Export Council for Energy Efficiency, “Market Assessment of Chile: 3. Energy and Electricity in Chile,” (n.d.), found at http://www.ecee.org/. Retrieved October 2000. 9. Export Council for Energy Efficiency. 10. Diaz-Bautista. 11. Ibid. 12. Ibid. 13. Laura Stern, “Market Distortions in the Chilean Electric Generation Sector,” The Journal of Project Finance 5, no. 3 (1999): 41–52. 14. See Stern 1999, and Patricio Rozas Balbontin, “La crisis electrica en Chile: Antecedents para una evaluacion de la institucionalidad regulatoria,” serie recursos naturales e infraestructura, no. 5 (Santiago: CEPAL, 1999), for a detailed analysis of the institutional crisis caused by the drought. 15. Basanes, Saavedra, and Soto 1999. 16. However, the commission also asked the government to introduce legal amendments to clarify the mechanisms for determining transmission and distribution charges. It instructed distributors to put their energy requirements out to tender among all generating firms. Finally, it resolved that within a “prudent” time, Transelec should become a joint stock company, operating exclusively in electricity transmission and open to investment from other parties. Estache and Rodriguez-Pardina 1998, 12–13. 17. Transelec was bought by HydroQue´bec in 2000. 18. The standard measure of market concentration, the Herfindahl index, backs up the claim that the Chilean market is an oligopoly. See Fischer and Serra 2000. 19. Endesa, being a fantastic tactical organization, also managed to join one of the pipeline projects and played with having alliances with both. Endesa is now a regional player, with its tentacles in a number of different Latin American markets and its stock highly coveted on the New York Stock Exchange.

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20. I see no difference in the types of policy decisions made on this issue from the authoritarian regime that began liberalization in Chile and the democratic governments of Argentina and Brazil. I see no reason, therefore, why liberalization should be considered with authoritarianism. 21. Interview by author, and EIA, “Electricity Reform Abroad and U.S. Investment: 4. The Transformation of Argentina’s Electricity Industry,” (n.d.), found at http://www.eia.doe.gov. 22. EIA’s “The Transformation of Argentina’s Electricity Industry” is the source of this historical background. It also gives a nice synopsis on how the wholesale market operates (available also from CAMMESA), which is not germane to our tasks here. 23. Ibid. 24. See Abdala and Chambouleyron 1999. 25. According to International Energy Agency’s report on Argentina (1999), YPF had a 57.1 percent market share by equity in 1997. 26. An overview of the Brazilian Energy Sector is found in 1999, Adilson de Olveira, Regulary Reform in Argentina’s Naural Gas Sector, Paris: IEA. Energia e desenvolvimento sustentavel (Rio de Janeiro: UFRJ-Instituto de Economia, 1998). 27. Government of Canada, Department of Foreign Affairs and International Trade (DFAIT), “Gas-Fired Turbine Technology Market in Brazil.” (October 2000), 4. 28. Financial shortfalls have been especially acute since January 1999, when the national currency, the real, was devalued. 29. Hugh Rudnick, “Desarollo del mercado electrico en Brasil,” Pontificia Universidad Catolica de Chile, (n.d.), found at http://www.latininvestor.com. Retrieved October 19, 2000; Peter Law and Hernan G. Garcia, “Gas Market Development in Brazil,” Energy Issues, no. 17 (World Bank, February 1999), 2; and Government of Canada, “Brazil’s National Privatization Program,” (n.d.), found at http://www.dfait-maeci.gc.ca. Retrieved September 28, 2000. 30. U.S. International Trade Administration, “Overview of Brazil’s Energy Sector,” (n.d.), found at http://www.ita.doc.gov. Retrieved November 30, 2000. 31. Canadian Trade Commissioner Service, “Bem-Vindo Ao Brasil: Market Overview of Power Equipment Market,” (n.d.), found at http://www.info export.gc.ca. Retrieved September 29, 2000. 32. There are limits on market share for generators and distributors nationally and regionally, as well as limits on cross-holding of shares generators and distributors. See Jose Claudio Linhares Pires, “Capacity, Efficiency and Contemporary Regulatory Approaches in the Brazilian Energy Sector: The Experiences of ANEEL and ANP,” Paper for Challenges and Opportunities Facing the Brazilian Energy Sector Conference, Oxford University, December 6, 1999. Linhares Pires’s paper also contains an interesting comparison of ANEEL and ANP.

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33. de Olveira, “The Changing Brazilian Electricity Market” (November 1999), found at http://www.liamericas.org. 34. Ibid. 35. In fact, U.S. company AES announced on May 8, 2001, that it was suspending a $2 billion power plant investment plan, citing increased risk. 36. We should note also that Petrobras, Repsol-YPF of Argentina, and several other partners have purchased the privatized portions of the Bolivian hydrocarbons company, YPFB. This gives them strong influence over Bolivia’s natural gas reserves and refineries. See “Petrobras to Acquire Bolivia’s Refineries,” Oil and Gas Journal, December 6, 1999, 36–7. 37. EIA, “Bolivia,” 2000. Bolivia had been exporting gas to Argentina, but the exports were stopped in 1999 by YPF, the Argentine producer of natural gas. There is some talk now about building a new pipeline (versus the one owned by YPF) and transshipping the gas through Argentina to the new pipelines that are exporting gas to Brazil. 38. “Generating Electricity Exports to Brazil,” Washington Times, March 31, 1999. 39. Ramiro R. Guevara, “The Changing Shape of the Bolivian Electric Industry,” (n.d.), in the National Law Center for Inter-American Free Trade, found at http://www.natlaw.com/pubs/spboeg1.htm. 40. Ibid. 41. Ibid. 42. The model for Bolivian privatization is that foreign firms are allowed to purchase 50 percent of the company and to run the company. The remaining 50 percent equity goes into a national pension plan fund. See “State Oil Company,” Washington Times, March 31, 1999. 43. EIA, “Bolivia,” 2000. 44. CIER, “Analisis general de diagnostico del marco institucional regulatorio para el funcionamiento de un mercado integrado,” in Proyecto CIER 02-Mercados Mayoristas e interconexiones Fase II (Montevideo: CIER, October 1999), 5–8; and Carlos Rufin and Evanan Romero, “Sustainability of Regulatory Reform in Latin America: A Comparative Analysis of Brazil, Bolivia, and Panama,” paper for LASA Conference, Washington, DC, September 11, 2001. The latter state that distributors can own 15 percent of a generation company. 45. EIA, “Paraguay” 2000. 46. Although a CIER document mentions a regulatory project that discusses the development of a separate regulatory entity and a wholesale market. See CIER 1999, 21–3. 47. Gerardo Honty, “El sector energetico Uruguay y la banca multilateral,” (Montevideo: CEUTA, 2000), found at http://www.sicoar.com.uy/centa/mobinfo .htm.

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48. EIA, “Uruguay,” 2000. 49. CountryWatch, “Uruguay: Energy.” There are further plans to create a wholesale market and a unified regulatory agency independent of UTE and ADME. See CIER 1999, 39–40. 50. For detailed sketches of the natural gas regulatory systems, see USITC “Natural Gas Services”; Humberto Campodonico, “La industria del gas natural y las modalidades de regulacion en America Latina” (Santiago: CEPAL, 1998); Andrej Juris, “The Emergence of Markets in the Natural Gas Industry,” (n.d.), and “Competition in the Natural Gas Industry,” World Bank, March 1998, n. 137; Lykke E. Andersen and Mauricio Meza, “The Natural Gas Sector in Bolivia: An Overview” (Bolivia: IISEC-UCB, Documento de Trabajo, January 2001); Paulina Beato and Carmen Fuente, “Liberalization of the Gas Sector in Latin America: The Experience of Three Countries” (Washington: Inter-American Development Bank, June 2000); Jean-Paul Terra Prates, “Brazil’s Three Natural Gas Systems: Sources, Markets, Regulations, and Business Perspectives,” Oil and Gas Journal (August 9, 1999), 54–63; UNDP and ESMAP, “Brazil: Hydro and Thermal Power Sector Study,” Report No. 197/97. (Washington: World Bank, 1997); Infrastructure Brazil, found at http://www.infraestructurabrasil.gov.br. Various reports; EIA; Diego Bondorevsky and Diego Petrecolla, “The Structure of Natural Gas Markets in Argentina and Antitrust Issues in Regional Energy Integration” (Washington: IDB, December 2001). 51. I conducted extensive interviews in Chile, Argentina, Uruguay, and Brazil with government officials, consumers, and companies over the course of two years, as well as examinations of newspapers and professional and academic analyses. See bibliography for a selective list. 52. My conclusions are based on numerous interviews and conversations. See bibliography for a partial list. Transmission investment is one of the Achilles’ heels of a deregulated system insofar as finding an appropriate toll system that provides for new investment. In a developing country context, where the grid may not be complete, this can be a particular concern. See the discussion in chapter 2. 53. I have not been able to document numbers of employees during the stateowned period, but my interviewees and anecdotal evidence strongly suggest that there has been a sizeable decrease in employment after privatization in every case. This is another social cost, in terms of skilled labor becoming underutilized. 54. I am presently conducting a follow-up study on the effects of fuel-supplies market on electricity prices. Considering the differences in fuel supplies as well as in a number of other market parameters and state roles, it does not make any sense to do straight price comparisons among the different countries. 55. Thanks go to Pierre-Olivier Pineau for emphasizing this point to me. Of course, this also begs the question of how you measure efficiency. Our task here is to examine the politics, so we stick to the political implications of prices.

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56. Bolivia’s market has the reverse relationship, which signals some possible market distortions (subsidies). Uruguay’s state-owned system shows a steadily increasing differential over time, which also merits further investigation. I think it is fair to have limited cross-country comparisons in this case, since we are looking at differences, though we should keep in mind that we are not looking at differences normalized for the size of the base value. 57. Fischer and Serra cite a Chilean distribution company whose rate of return was 35 percent in 1997, 185. 58. In 2002, new actions by the Brazilian government were to guarantee a portion of the exchange rate risk for investors and to subsidize gas transmission costs through consumer price increases. In addition, the government planned to require all power generators to sell 95 percent of power through long-term contracts, up from 85 percent, in order to reduce price volatility. See Raymond Colitt, “Brazil’s Energy Crisis Sparks Reform Plan,” Financial Times, January 17, 2002. 59. I am working on a follow-up paper that expands on this theme. The state’s role is even more important not only in terms of distributional effects, but also in terms of antitrust, due process, consumers’ rights, and integration with other nations.

CHAPTER FOUR

The Political Economy of Sectoral Integration The Case of MERCOSUR Electricity Markets

IN TRODUCT I O N Both political and economic integration theory tends to be Eurocentric, that is, derived from the particular case of the EU.1 In terms of sectoral analysis, the literature also concentrates on the specific sectors of agriculture, labor, and environment and almost exclusively on NAFTA’s effects on Canada, the United States, and Mexico and the integration process of the EU.2 By contrast, the MERCOSUR3 project, which dates back to 1994, has been relatively neglected in the international political economy. The few exceptions tend to be published within the region and descriptive of the process vis-a`-vis a potential free trade agreement of the Americas.4 MERCOSUR is a bold experiment in South-South integration that deserves more attention. While there are differentials among the states, with Brazil’s large economy serving as the anchor in the process, MERCOSUR is unique in terms of the equivalence of the level of development of its major partners. Unlike the Asian Pacific Economic Cooperation

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agreement (APEC) and other nascent trade agreements involving substantial numbers of developing countries, moreover, MERCOSUR has made measurable progress as evidenced by substantial increases in intraMERCOSUR trade flows. Thus, the particular issues surrounding MERCOSUR’s influences on changes in the industrial bases between Argentina and Brazil distinguish the agreement from both the EU and NAFTA.5 In fact, in many ways, integration by private companies from Brazil, Argentina, and Chile is leading in the MERCOSUR process, rather than by governments as arguably was the case in the EU and NAFTA. The integration game is far different from the domestic regulatory game. In chapter 2, we discuss the expected intrastate and societal interest group coalitions that would, in fact, reinforce the momentum toward liberalization through integration across borders. Based on that framework and our empirical analysis of market complementarities below, we would expect overwhelming support for a MERCOSUR energy market. However, while our case studies have shown that SoCo states have been able to carve out proactive policies that advance national objectives, (including industrial policy, environmental preservation, and energy resource development) they are unsure how to preserve their national policy prerogatives on the level of market integration. Indeed, the fact that SoCo states have strong degrees of regulatory state autonomy is behind the strong reluctance of the big three (Argentina, Brazil, and Chile) to move forward in MERCOSUR on any front. The obvious model forward for MERCOSUR is the EU, where national objectives embedded in regulatory policy are replaced with regional objectives and regulations.6 However, for a number of reasons that we shall discuss, adopting an EU framework is extremely problematic in the MERCOSUR setting. WAYS IN W HICH E L E C T R I C I T Y I N T E G R AT I O N CAN BE ACHI EVE D Before we discuss the politics of electricity regulation in the Southern Cone, we must discuss the basic technical ideas about how an integrated market could work. The following steps in the electricity integration process should be considered as cumulative ones:

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1. increased border transactions 2. coordinated efforts to build linked transmission grids (private parties may have limited incentives) 3. international commodities and electricity exchange board, with increased role of traders 4. uniform trading regulations 5. dispute mechanism 6. international wholesale market operations 7. coordinated government policies 8. coordinated dispatch 9. secondary markets 10. international organization to run the markets

H OW FAR ALO NG I S M E R C OS U R ? E X I S T I NG AGREEMENT S FO R E L E C T R I C I T Y I N T E G R AT I O N IN ME RCO SUR Electricity integration has already occurred in a limited fashion in the region.7 The joint national large hydroelectric projects between Brazil and Paraguay, Argentina and Paraguay, and Argentina and Uruguay were created through national agreements on construction and equal sharing of the benefits. Also, there are already existing nonhydroelectric transmission lines in several places in the region. Most prominently, there is now a (large) 500 MW line running electricity from Northeastern Argentina to Brazil, with plans for the construction of another one. There is also a new agreement between Brazilian generator Furnas and Chilean company Gener (recently bought by U.S. company AES) for the export of 1,200 MW of Argentine electricity to Brazil. The new transmission line required for the operation should be completed in mid-2003, with 400 MW being traded from 2002.8 There is also a 300 MW line from Northern Argentina to Chile. There are a number of small (⬍ 1 MW) interconnections throughout the region. Interconnections with Brazil require converter stations, since Brazil transmits its electricity on a different frequency. There is a great deal of discussion about other potential interconnections across borders. One place would be a line crossing Cen-

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tral Argentina into Santiago, Chile. Another would be a line that connected Buenos Aires with Southern Brazil through Uruguay. All of the governments have set up some regulations to guide international transactions in the region. These regulations allow for importation and anticipate further connections, and some even provide for dispute mechanisms. However, every country has different regulatory mechanisms to deal with traded electricity. Since the transactions are now between private parties, there is no set formula regarding the accrual of benefits. For example, for the purposes of dispatch, Argentina considers imports as coming from a “virtual” generator that is treated as if it were domestic. Exports, similarly, are treated as a “virtual” domestic demand. By contrast, Bolivia requires a license for import. Brazil’s regulatory agency (ANEEL) also had to pass a resolution to permit the importation of electricity from Argentina mentioned above. Brazil’s regulations guarantee international access to its transmission and distribution networks, too. Chile does not seem to have a regulatory statue dealing with international interconnections of electricity, but it has signed a protocol with Argentina, mentioned below, that seems to signal a clear intent to continue its open market policies. Paraguay’s electricity market is still state run. The Paraguayan government has created a law, No. 966, that anticipates future international interconnections to be administered by the state electricity agency, ANDE. The Uruguayan government also must authorize any international interconnection.9 There are already a few agreements dealing with interconnections as well. Argentina signed a “Protocol” and Memorandum of Understanding with Brazil in 1996 and 1997, respectively. The Protocol promoted and permitted interconnections and trading of electricity among private parties. Also, Argentina signed a Protocol to regulate interconnection with Chile in 1997. The accord seems to assure free market trading of electricity, such as assuring the lack of discriminatory market practices, and provides for a diplomatic settlement of disputes.10 APPLYI NG O UR P OL I T I C A L ECON O MY FRAM E WOR K T O M E R C OS U R ELECT RICIT Y I NTE G R AT I ON Based on our state autonomy-interest group coalitions framework for integration from chapter 2, we can examine MERCOSUR electricity

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trading by looking at two levels of analysis.11 The first level looks at the domestic political economy situations for electricity integration. The second level looks at the international and regional geostrategic context. This level refers to the actions and positions of the states and, to a lesser extent, the international and regional organizations vis-a`-vis liberalization. We shall then make some predictions about the future of electricity integration in the Southern Cone. As we explain in chapter 2, the state in the MERCOSUR region is generally divided between pro- and anti-integration forces, with the prointegration forces decidedly superior. The anti-integration forces generally include the same forces that have been antideregulation and anti-privatization, namely, parts of the military and the bureaucracy, states, or provinces that import energy from other provinces, companies, and labor unions that benefit from the status quo, and consumer and environmental NGOs. There are two basic arguments against the integration of energy supplies in the Southern Cone. One is that energy supplies are a nonrenewable national endowment that should be guarded for national security purposes and future generations. Importation increases vulnerability and dependency on external sources. Another is the general fear of adjustment to regional standards. Unions, companies, and bureaucrats rightly fear that integration will mean a domestic loss of well-paying jobs in the energy sector and a loss of influence. In many cases, even in a privatized market, some companies, whether industrial or energy-producing, benefit from a highly regulated domestic environment, such as receiving hidden subsidies or dominating a market or market niche. They rightly fear increased competition for the same reasons as do their employees. Environmental NGOs, as well as organizations in favor of more stringent regulatory standards (such as those who push strongly for the highly laudable goal of improving energy efficiency), fear with reason that an integrated market will sink regulatory standards to the “lowest common denominator.” On the other side are the forces that are pro-integration, using the general neoliberal arguments of reduced state interference, greater consumer choice, and improved efficiencies and surpluses from liberalization. Newer cohorts in the bureaucracy and private industry tend to be more receptive to the necessity of opening up markets to competition and to foreign investment. They tend to embrace globalization as a necessity and see the opportunities of an increased market size, greater

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investment, technological development, and better-paying jobs at the top as outweighing the price of adjustment. We should add that “the national interest” also weighs heavily in the arguments of the proliberalization forces. They see a revitalized energy sector as improving national competitiveness, especially in industry, and leading to important geostrategic “spillovers.”12 By spillovers, we mean that progress in one sector tends to push governments toward agreements in other sectors. Thus, an agreement in MERCOSUR on reduced barriers to goods, such as heavy machinery, should also mean increased pressure to liberalize complementary services, for example financing for such machinery. Last but not least, from a geostrategic point of view, proponents of integration believe creation of larger regional markets improves the MERCOSUR’s chances in global competition through economic efficiency and improves the possibilities at the international negotiating table.13 In the case of the Southern Cone, no country with the questionable exception of Argentina has any domestic industrial base that would compete for the use of those energy supplies with Brazil, which would be the main source of expected resistance. In Argentina, the loss of competitiveness of domestic industry, in good part due to the dollarized exchange rate of the 1990s, should lead to greater protectionism. However, the dire need to earn foreign exchange through exporting has contributed to a rather muted resistance to integration, particularly given industry’s anxiety about ensuring access to the Brazilian market. In the case of Chile, the military resisted the potential multiple energy connections that one would expect with Argentina until 1997, when a severe drought led to the development of gas pipeline importations from Northern Argentina. While in Uruguay and Paraguay there is strong resistance to privatization, there is no such resistance to integration, as both rely upon external markets. There is such a strong dependency on external markets that these states will probably always continue to wield a strong, if not dominating, influence in the sector. In Uruguay, a plebiscite in 1999 as to whether the state electric company should be privatized was soundly defeated through a coalition of civil service unions, company management, and public sentiment against increased vulnerability (as it is perceived) to foreign companies or investments. In Paraguay, the state electric company, ANDE, is the most important source of government revenue. In Bolivia, while there has been resistance to privatization of

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some services, particularly water, there is not the same mobilization in regard to energy. The electricity generation and fuel industries in Brazil, a potential obstacle, are still dominated by the state, which has been pro-integration overall. In general both bureaucracy and industry in Brazil have been strongly pro-integration. In terms of leadership, with the possible exception of Julio Sanguinetti in Uruguay and Paraguay’s military leaders, every leader seems to be strongly pro-integration and pro-liberalization. In fact, in some cases, the anti-integration forces have been “bought out,” through the very interesting development of South-South economic imperialism. For example, in the case of Chile, the labor unions are the largest holders of the few allowed pension funds. They, in turn, have invested heavily into the national oligopoly—Endesa and Gener. We would expect the Chileans to be reluctant therefore to open up their own market, and that has been the case so far, as we have seen. However, since both Endesa and Gener have bought up significant energy properties throughout the region, they are naturally strong proponents of integration. An even stronger proponent on the basis of a regional strategy of integration are the foreign companies, including Enron (until recently) and Duke Energy, as evidenced by their generous sponsorship of pro-integration organizations, such as CIER. For these companies, it makes perfect sense to have a regional strategy that reduces management overlap, simplifies and strengthens the regulatory and jurisdictional operating environments, and permits them to take advantage of their large size and regional holdings to move around fuel supplies and other assets and to respond more flexibly to changes in the market across the region. In the case of gas and petroleum monopolies of Argentina and Brazil, both national and private interests are at stake, and both countries are for integration on their terms. In sum, on the domestic level there are no strong forces in any country at the moment that would oppose the strong coalition pushing for integration. Only the recognition of the price of adjustment and the complexity of the undertaking should slow progress of the process. Region al Level An a l y s i s Table 4.1 summarizes the distribution of power (political and electric) in the Southern Cone, and provides the backbone of our international level analysis.

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Table 4.1 Energy Profile of the Southern Cone, 1997

Source: IEA, Energy Bal.s Notes: GDP ⳱ PPP, 1990 U.S.$; Argentina gets 11% & Brazil 1% from nukes. DD ⳱ large deficit; D ⳱ deficit; SS ⳱ large surplus; S ⳱ surplus

This table demonstrates, first, from a strictly (international) realist point of view that Brazil’s economy dominates the region, and is the linchpin to understanding why energy markets are integrating in MERCOSUR. Argentina and Chile can be considered as part of a “second tier” in negotiations, and Uruguay, Paraguay, and Bolivia, a third tier. Second, we see there is a natural complementarity among expected deficit and supply countries, creating an almost irresistible natural push for market integration. Third, we should expect that energy surplus countries should have more leverage over expected deficit countries. While there is a mutual dependency involved between the two parties, the fact that energy is the “lubricant” for the whole economy means the vulnerability of the importing nation is much higher. While in Brazil’s case, the size of the market probably outweighs any clear vulnerability, in Uruguay’s and Chile’s case, there are concerns about a growing dependency on neighboring countries’ fuel sources. Fourth, it is a fact that hydroelectric-based systems, such as Brazil’s, are naturally more volatile than natural gas-based systems, such as Argentina’s, since hydro-based systems rely upon seasonal rainfall. Thus, integration will mean greater supply and price volatility for Argentina. We can therefore see the emerging regional market as an oligopoly from the supply side, and a monopsony from the demand side, given that the Brazilian government acts as a gatekeeper to its own market. Which market characteristic is more important? Given the existing pipeline in Bolivia, the existing dam projects in Paraguay and Uruguay, and

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the pipelines and transmission lines already underway between Argentina and Brazil, it seems clear that Brazil’s ability to use its demand power in the region far outweighs any possibility of collusion among the sellers of energy. Indeed, through Petrobras, the Brazilian government is fully up front on supply developments. Moreover, Bolivia and Paraguay have long-standing enmities, which would prevent collusion between them. We could add the fact that Venezuela and its untapped domestic fields provide other competing sources of fuel outside of the subregion as a final factor in reducing the power of supplying nations. OUR P REDICTI O N F OR T H E F U T U R E OF ELECTRI CIT Y I NTE G R AT I ON I N M E R C OS U R Based on our case study analysis of the coalition of domestic forces, market ideas, and geopolitical strategies, there seems no question that the integration of electricity markets will continue to progress. Taking just the fact that Argentina, Bolivia, and Paraguay are countries with large surpluses in energy reserves, and that Brazil, Chile, and Uruguay are strong deficit countries, the development of trading relations seems inevitable. Add to this aspect the acceleration of the growth in Brazil’s economy and energy demand, and the question of integration seems hardly the point. Moreover, the overall position of Brazil in the region suggests that integration will occur more on its terms than those of any other party. The more interesting questions of how far and to what effects integration will go are ones to which we now turn. Of the different cumulative steps we noted previously, steps one (increased electricity transactions) and two (linked transmission grids) are already underway. These transactions will only serve to strengthen the pro-integration coalition we have outlined.14 In Argentina, while both the generators’ association (AGEERA) and the distributors’ association (ADEERA) have endorsed the idea of exporting to Brazil, they have also expressed concerns. AGEERA is worried about the lack of harmonization of regulations with Brazil, the increased volatility of prices that interconnection with the hydro- (and therefore volatile) based system in Brazil entails, and the costs of installing and maintaining the infrastructure of future interconnections. ADEERA seems to be worried about the effect of exports on local prices and integrity and quality of the system of increased connections with Brazil. The order of dispatch

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between hydro- and gas-based energy could depend upon the costs formulae worked out by the Brazilian government, creating an additional preoccupation for the Argentines whose generators are gas based. My impression is that the Argentines are particularly concerned about both the size of the potential Brazilian competition and the possibility that the Brazilian government may provide more support, even subsidies, to its own generating companies. Support could also come indirectly, for example through differences in interest rates or tax policies from Argentina. Probably the main issues at this level of integration will be the competition between gas and electricity transmission as modes of trade on the one hand, and the placement of plants on the Argentine, Brazilian, or Chilean side of the border on the other. The latter has very important implications for capturing the value added of the production and operation of a plant within one’s borders, and the equipment, maintenance, construction, and labor contracts that go along with it. There are other important positive and negative externalities to having a power plant. For example, a viable set of power plants requires engineers to run them, which means the development of a market for skilled personnel. This need for a high level of skills can help lead to a more skilled workforce and a more capable educational system. In terms of negative effects, there are the environmental problems, including pollution from the running of a power plant, as well as the capital costs of investment. The investment money to build a power plant represents an opportunity cost for monies that could be invested elsewhere. Steps three and four of the integration process seem likely in the long run for the same reasons, with a few possible roadblocks that might delay this development. One would be the occurrence of either a natural disaster, such as a drought, or a sustained increase in fuel prices that changes the calculations of the actors as outlined above. An increase in fuel prices could cause the domestic coalition in Argentina, which is anti-integration, to have a much stronger argument and mobilize to maintain lower prices by avoiding exportation. Another would be the unfolding of substantial problems as the privatization of the electricity sector in Brazil progresses. There are myriad possibilities, but the main ones that come to the forefront are: resistance to the sale of assets by one or more state actors, such as Petrobras; recurrence of macroeconomic or political instability once Fernando Henrique Cardoso steps down;

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successful blocking action by the state or provincial level in Argentina and/or Brazil. A more remote but mentionable possibility is the development of a broad-based social movement coalition that might include activists fighting for Brazilian land reform, labor unions, and disaffected civil service workers in the newly or about-to-be privatized electric companies. My estimation is that an anti-integration coalition, especially in the wake of successful privatization, is going to lose any battle to reverse liberalization, including integration. However, that does not mean that such a coalition could not make important modifications to the way that deregulation, privatization, and integration are carried out in Latin America. One danger, which seems inevitable, is that the growing concentration of market power occurring in each country is being reproduced on the regional level.15 While saving transaction costs, the size of regional oligopolies will render companies that are much harder to regulate and rein in, since the relative power of each government will be diminished. A counterbalance may occur as other industries follow the same pattern of oligopolization; however, in general, industries may be at a disadvantage to generators for two basic reasons. One is that they are more laborintensive, and thus have more influence on and ties to domestic and local politics than generators. The other is that, in the sense that they create jobs and have linkages with other industries, an unavoidable national competition exists for them among the states in the region, making coordinated sectoral policies that much harder. By contrast, as a network infrastructure industry, generation is tied to a local grid, and thus less open to appeals to mobility across national borders. When talking about thermal plants, there may be some local competition over where they will be built, but there is unlikely to be any serious international competition outside of the border areas. The coordination between YPF and Petrobras has important portents for their possible collusion and domination of an integrated energy market. In the long run, for a genuine integration (as opposed to cross-border trading) to occur, there would have to be two major areas of progress in the region. One would be a harmonization of the regulatory standards. This step is much harder than simply signing an agreement, since each regulatory change entails an important effect on the market and a change in philosophy. As we have seen, each set of regulatory practices has developed in conjunction with the historical and institutional con-

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text, the development of ideas, and the coalition of interests unique to each country. Thus, Chile might have to accept some limits on the market share of its generators in order to ensure stable market access to Brazil. The other would be an acceptance of increased vulnerability to the market and economic shocks of other countries. For example, the relatively stable Argentine system would be subject to the volatility of the rainfall patterns of Brazil. More importantly, as we have seen with the devaluation of the real in January 1999, there are important spillover effects of any integration efforts from one sector to another. Therefore, for healthy sectoral integration of electricity to take place, there must be a greater level of macroeconomic coordination among the partners of MERCOSUR. Last, but not least, would be the important jurisdictional issues that would arise from such an effort. Regulation of a combined market would require some form of dispute relief and coordinated policy-making institution, which would eventually mean a supranational entity with powers above those of national regulatory agencies. In sum, as integration develops, both the level of political complexity and the need to transfer power to a supranational authority increase. CON CLUSI O N: H OW W OU L D I N T E G R AT I O N CH AN GE T HE POL I T I C A L E C ON OM Y OF ELECT RICIT Y REG U L AT I ON I N T H E SOUTHERN CO NE ? As we have discussed, the pro-integration coalition would strengthen the pro-liberalization forces and ideas in each participating country. However, integration would also create its own political effects through the added regulations we have just described. There would be important market shakeouts. For example, the “magnetic” power of Buenos Aires for the Argentine market would be reduced, as the border areas with Brazil would develop at an accelerated rate. At the same time, the political strength of the Argentine generators would increase while that of large industrial users would be reduced. On the other side, the Brazilian generators, particularly the hydro plants, would lose much of their leverage in the border areas with Argentina, while the industrial users in those areas would gain new strength. Perhaps the most sobering question in terms of outcome is what would happen to nascent environmental

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and consumer groups, which already tend to be weak on the domestic level? We would guess that the role of the international funding agencies, such as those in Europe who are presently funding some of the local NGOs, would be enhanced as regional coalitions were formed. While this could allow such coalitions to achieve some “political economies of scale” and benefits of collective action, let us not also forget that those organizations with more local and exclusively domestic roots will probably atrophy in relative terms. Most importantly, the political bodies will be able to use the international regulatory structures as a means of buffering public opinion. Thus, like other international regimes, a regional one for electricity would be rendered only very indirectly responsive to political reclamations. The big losers would be the labor unions and the environmental movements—the original opponents of deregulation as it has been proceeding on the domestic level. Another loser would be residential consumers, who already have been largely neglected in the policy process. Last, but not least, we are fearful that the most important goal of energy efficiency, currently only halfheartedly pursued on the domestic level in some of the countries, would drop off completely in a regional scheme. What we see therefore is a strong element of desconfianza, of creating new international institutions in those SoCo countries unwilling to cede their national political prerogatives. Underlying the MERCOSUR dynamic is a long history of intraregional economic and political competition for markets abroad, and a desire to establish a stable political order at home in the wake of continuing economic crisis and military transfer of power to new democratic regimes. It is quite understandable, then, that the SoCo mind-set is unable to consider accelerating the volatility of change by moving power in a meaningful way to new regional institutions. On the other hand, the spillover effects will go both ways. As electricity should be a relatively easy sector to integrate, for the technical reasons we discuss in chapter 2, the overall integration process will have important economic benefits for the region and the main political economy actors as a whole. In looking to the world market, only a unified SoCo region stands a real chance to make a play in the international economy. The success of the regionalization process will ironically determine the autonomy and power of each country in the world political economy— the region can make each nation stronger. What we hope to see in the

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long run is a unified institutional structure. It could begin to acquire the characteristics of a regulatory state autonomy, which we have seen on the national level, while allowing for greater transparency, participation, and accountability to balance out the pressures of the proliberalization coalition. New MERCOSUR institutions may even have a better chance at creating better governance, since they are not mired down in the vicious cycles of most of the national development projects in the region. The project, then, is to construct a values-institutionmarket milieu that moves the Southern Cone as a whole forward through regional integration. N OTE S 1. Anil Hira, “Deconstructing Integration: From Europe to East Asia,” National Social Science Perspectives Journal 14, 3 (1998): 59–71; Ernst Haas, “The Study of Regional Integration: Reflections on the Joy and Anguish of Pretheorizing,” International Organization 24 (1970): 622–28; James Caporaso and John T.S. Keeler, “The European Community and Regional Integration Theory” (plenary address, Third Biennial International Conference of the European Community Studies Association, Washington, May 27–29, 1993); and Petri Minkkinen and Heikki Patomaki, The Politics of Economic and Monetary Union (Boston: Kluwer, 1997). 2. For example, see Benjamin Cashore and Ilan Vertinsky, “Policy Networks and Firm Behaviours: Governance Systems and Firm Responses to External Demands for Sustainable Forest Management,” Policy Sciences 33 (2000): 1–30; William P.D. Coleman and Wyn P. Grant, “Policy Convergence and Policy Feedback: Agricultural Finance Policies in a Globalizing Era,” European Journal of Political Research 34 (1998): 225–47; Barry Carr, “Crossing Borders: Labour Internationalism in the Era of NAFTA,” in Neoliberalism Revisited: Economic Restructuring and Mexico’s Political Future, ed. Gerardo Otero (Boulder: Westview, 1996); Jonathan Heath, “The Impact of Mexico’s Trade Liberalization: Jobs, Productivity, and Structural Change,” in The Post-NAFTA Political Economy: Mexico and the Western Hemisphere, ed. Carol Wise (University Park: Penn State U. Press, 1998); and Victoria M. Murillo, “From Populism to Neoliberalism: Labor Unions and Market Reforms in Latin America,” World Politics 52 (January 2000): 135–74. The automobile industry, particularly in the case of NAFTA, has received some attention as well in the literature on Latin America. It is included in the pioneering work of Gary Gereffi and Donald Wyman, Manufacturing Miracles: Paths of Industrialization in Latin America and East Asia (Princeton: Princeton U. Press, 1990). Most of the limited initial literature on integration

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initiatives outside of NAFTA has focused on the language of the trade agreements and the implications vis-a`-vis international integration theory. For example, see W. Andrew Axline, “Free Trade in the Americas and Sub-Regional Integration in Central America and the Caribbean,” Canadian Journal of Development Studies 21, 1 (2000): 31–53. On European sectoral analysis, see for example, Wayne Sandholtz and John Zysman, “Recasting the European Bargain,” World Politics 42 (1989): 95–128; and Wayne Sandholtz, High-Tech Europe: The Politics of International Cooperation (Berkeley: U. of California Press, 1992). 3. For simplicity, I include Chile as part of MERCOSUR, even though it is an associate member. The other members are Argentina, Bolivia, Brazil, Paraguay, and Uruguay. 4. Felipe de la Balze, comp., El futuro del MERCOSUR: Entre la reto´rica y el realismo (Buenos Aires: Associacio´n de Bancos de la Argentina, 2000); Riordan Roett, ed., MERCOSUR: Regional Integration, World Markets (Boulder: Lynne Rienner, 1999); and Stephan Haggard, “The Political Economy of Regionalism in the Western Hemisphere,” in Wise, Post-NAFTA Political Economy. 5. Major sticking points on further progress in MERCOSUR include the sensitive industries of automobiles, textiles, clothing, and footwear, as well as government procurement and regulatory differences. 6. I compare the institutions for energy integration in MERCOSUR with those of other regions in an article. See Anil Hira and Libardo Amaya, “Does Energy Integrate? (A Comparison of Energy integration in Central America, MERCOSUR, the E.U., and Nordpool),” in Energy Policy (forthcoming). 7. An exhaustive list of the interconnections in the region by country is found in CIER 1999, 133. 8. “Furnas, Gener to Build 1,200 MW Interconnection,” Business News Americas (n.d.), found at http://www.BNamericas.com. Retrieved February 8, 2001. 9. CIER, 25 Anos (Montevideo: CIER, 1989) and “Analisis general de diagno´stico del marco institucional regulatorio para el funcionamiento de un mercado integrado,” in Proyecto CIER 02-Mercados Mayoristas e interconexiones Fase II (Montevideo: CIER, October 1999), 63, 66–8, 78–9, 107–8. It is interesting to note that Peru, while not part of this study, seems to be the only major country in South America without some legal provisions for international interconnections of electricity. 10. CIER 1999, 63–6. 11. This section is based upon extensive interviews by the author in the MERCOSUR region over the last two years with government officials, consumers, company officials, regional organizations, and independent consultants. See bibliography for a selected list of organizations interviewed. 12. I am using this term in the sense applied by neofunctionalist integration theory. See Hira 1998.

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13. There is also casual talk about an eventual South America–wide energy market. 14. “Entrevista a Francisco Ponasso,” Electricidad (October 23, 2000); Ernesto P. Badaracco, “Como lograr la equidad,” AGEERA Energia & Negocios (May 2000): 12–14; and “Interconexion de los Mercados Electricos del MERCOSUR” (paper, presented at second Congreso Latinoamericano y del Caribe, Punta del Este, Uruguay, March 27–29, 2000). 15. For example, Enersis, already a behemoth in the Chilean market through its company Endesa, already has important holdings in Brazil and Argentina and is part of the consortium that runs the transmission line connecting the two countries.

CHAPTER FIVE

Conclusion Solving Electricity and Other Regulatory Policy Problems and Utilizing Regulatory State Autonomy

PROB LEMS SP ECI F I C T O T H E ELECTRI CIT Y SECTOR As has been pointed out in the public policy and economic adjustment literature, shocks to any system lead to a period of hand-wringing and second-guessing that can be helpful if it leads to a thorough and renewed examination of assumptions and a lowering of biases.1–3 Unfortunately, what usually happens is that those with entrenched points of view dig their heels in even more and the conversation becomes more vociferous, but not more in depth. We can see these results in the drought in Chile in 1997–98 and in the more recent crisis in California in 2000. In both cases, we ideally want to ask: Was the supply shock (in the case of Chile), or the demand shock (in the case of California) something that a stateoperated system could have handled better? It seems unlikely in either case, given the lack of investment and inefficiencies cited earlier, that there would have been any less scrambling to deal with the unforeseen system shocks. The second question, which we have answered, is: What

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changes could be made to improve either markets or state-run systems to make them more efficient, equitable, and accountable? Before we embark on a long list of recommendations about how markets can be improved on both the domestic and international level, we should define more clearly how we expect an ideal market to function: perfect competition (as a tool to achieve economic efficiency) perfect information technological progress through appropriate incentives quality, reliability, stability long-term investment in system upgrades and expansion social equity of outcomes international competitiveness accountability transparency participation attention to environmental concerns, worker safety, energy efficiency, and other goals

There should not be much difference between a well-functioning market and a well-managed SOE. In practice, we see that there are important differences in how these two types of operations function. First, the most important difference is that both losses and gains are spread over different groups. In the case of an SOE, the losses are spread over the entire tax-paying population. Therefore, when SOEs become vehicles for other purposes including patronage hiring and cross-subsidization, their level of efficiency toward their original mission necessarily declines. Second, without competition, their incentives to provide quality service are almost exclusively internal, and therefore service tends to be much worse. Third, because SOEs have been only internally accountable, they are more subject to corruption on a grand scale and to misallocation of resources. Turning to privately run electricity sectors, we have already mentioned the problem areas: market concentration and collusion, artificially high rates of profits on the basis of manipulation of the regulators, and control of important markets and profits by foreign investors. However, if there are losses or gains, these are concentrated among the

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small group of shareholders. Let us remember also that distribution and transmission are treated as private or state-run monopolies (in some cases for transmission), so that similar efficiency problems arise whether we are talking about private or public monopoly. The best situation for generation, then, would be a market situation in which there are genuine competition among generators and allowances or incentives for cross-subsidization of targeted industries, social groups, regions (according to long-term national objectives), or SOEs, which have aspects of accountability and transparency and a limited number of objectives that can be clearly evaluated. In addition, we would want an energy system to pursue national goals of importance, such as developing alternative environmentally friendly fuels. In the case of Brazil, the emerging situation is particularly interesting in that SOEs, with more limited objectives, will be competing with private generating firms in the same market. Thus, whether we arrive at it from either the SOE or the private angle, what we want is “an energy market with legitimate social purpose.” We have seen that this may be approached from either a predominantly public or private system, or some hybrid combination. The key is to have the appropriate regulations for the particular energy market context of the country. TH E P RO BLEM O F M A R K E T S H A R E One of the key arguments in this book is that neoliberal reforms ignore market power.4 That is, instead of competitive markets, we find oligopolistic markets. I have argued elsewhere that this is the case internationally, but let us concede at a minimum that when markets or niches have concentrations of players, a very strong regulatory regime is required to ensure that markets function efficiently. This means a tough antitrust operator, a genuine consumer ombudsman, and a financial regulator, in addition to the problems of collusion or dominance in the multiple areas of the energy market we have already discussed. What we find instead is that in key energy sectors market power is concentrated; this partly reflects undue political influence by particular interests. That is, Latin American countries have, on the whole, transferred an inefficient and corrupt public monopoly for a more efficient and less corrupt private oligopoly. The difference is that the private oligopoly has incentives to reduce prices in the short run, but in the long run, public in-

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terests, including alternative energy and investment in new plants, are neglected as colluding apparatuses are developed.5 This is particularly the case in the residential sector, so distributional effects of reregulation are overlooked. Even in a market situation where perfect competition is impossible because of supply (hydro-based) or small size of the market, an appropriate regulatory mechanism and independence are needed to preserve national priorities. Private interests can be convinced that such a regulatory system is in their interests. The appeals to nationalism and the fact that they, too, are citizens, are important on the moral plane, but a clear, independent, and transparent regulatory structure can also be construed as in their interests. If the selling value of market systems is that the one who works harder or is more talented should be rewarded more, the underlying and more important base value is that of “fair play,” or equal opportunity. Surely this foundational rhetoric behind neoliberalism can be put to some good use to create accountability in markets. If the selling value of the market is that oligopoly rents for accumulation enhance international competitiveness or a national enterprise, then the rewards of such expansion should be distributed throughout the society.

SKETCHI NG O UT S T R AT E G I E S F OR REGULATO RY I ND U S T R I A L P OL I C Y I N A GLOBAL ERA While no one Latin American state has a monopoly on the perfection of an energy market model that works for it, there are some very interesting variants that have come out of our survey. All of these variants describe a form of regulatory industrial policy that is perfectly commensurate with global trading and market liberalization rules. The model Chile presents is one most similar to the East Asian developmentalist state, which is ironic given Chile’s stellar macroeconomic neoliberalism. On the microeconomic side, we see that Chile uses mainly informal methods to create a national oligopoly. The oligopoly is owned primarily by a coalition of large, important interest groups of society, namely the pension funds of the labor unions, the government, the military, and the domestic businesses.6 The oligopoly rents of this model derive from charging domestic consumers a premium above the market price. These

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rents are then used to expand international assets and investments, resulting in a virtuous circle of capital accumulation. The Argentine model sets up a much more perfect market in terms of the levels of competition and end user prices. In the electricity sector, it expects foreign investors to do most of the work on the supply side. The model of competition is deceiving, however, as the Argentine state is able to form a close partnership in the fuels supply market with YPF, the dominant player and former SOE. Thus in some ways, Argentina trades a portion of oligopoly rents that could be used for imperialistic expansion a` la Chile in return for lower electricity prices, which also aids its industrial base. We should remember the context of Argentine politics is one of the political domination of Buenos Aires, where more than half the population lives. Argentine unions do not have the same stake in the electricity sector as do their Chilean counterparts, but so far have provided little real opposition to liberalization. The Brazilian model of industrial regulatory policy is an interesting hybrid of public and private partnerships. In Brazil, the state still dominates both the fuel supplies and the electricity markets. This is partly out of necessity, given the strong hydro base of the energy supplies. The Brazilian state would like to limit or channel foreign investment to new natural gas generation and distribution. However, foreign investors are still well aware of the domination of Petrobras and have been unwilling to dance to the Brazilian government’s tune in the generation sector thus far. Foreign investors are well aware of the political crisis that looms behind the current energy rationing. Thus, the Brazilian government (through Petrobras, naturally) has recently had to sweeten the terms of the deal for foreign companies by guaranteeing a certain exchange rate. In Brazil, we have a very neat system of state domination with limited private opening. Even if the Brazilian system ends up increasing the incentives for foreign participation, Brazil will clearly follow its tradition of state-led industrial policy and the government will remain in the driver’s seat. If we consider the similar interventions of the U.S., Asian, and European governments, we see that despite all the talk of neoliberal restrictions and a liberalized world, the real game is not open, but rigged competition for markets. Consider, for a moment, how many highpaying jobs are at stake in the automobile, steel, and airplane industries. It should be no wonder, then, that the U.S. government bailed out auto-

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maker Chrysler in the 1980s and placed antidumping restrictions on steel imports on several occasions, most recently in 2001. It should be no surprise that the South Korean government has helped to bankroll the development of new automakers Kia and Hyundai. It should be no surprise that a consortium of European governments are responsible for the principle competition to Boeing in Airbus Industries. Or, that, more recently, that the tiff between Canada’s Bombardier and Brazil’s Embraer airplane manufacturers involved mutual accusations of subsidization. The truth is every state manipulates, intervenes in, protects, and subsidizes sectors, from agriculture to space satellites. Even in the most die-hard neoliberal view of universal free trade agreements, there will still be major state interventions in the market. When the United States and other dominant players in the world push for free trade, they are simply attempting to seal in the advantages of their own market dominance of certain sectors. It is no surprise then, that the United States pushes for agricultural liberalization, but Europe does not. It is no surprise that Mexico would like to have a liberalization of labor mobility in NAFTA, but not Canada or the United States. Thus, a free market in practice seems to be in the eye of the beholder, a reflection of national and ideological interests. We should instead speak of degrees of liberalization and eschew the dichotomous terminology that is useful only for political posturing and international negotiations. Consider again the vast and incredibly important market interventions of the developed countries in their factor markets through tax setasides and incentives, defense expenditures, subsidizations of research and development, support of higher education, and major investments of infrastructure.7 In these terms, developing countries, particularly those with limited internal markets, have little bargaining power with multinational corporations and developed countries. Thus, we can say that only Brazil, South Africa, China, and India possess a reasonably large enough potential internal market to have substantial leverage in international negotiations. There seem to be two options available to developing countries in shaping their industrial policy strategy. First, to create South-South integration, which allows them greater leverage visa`-vis developed countries, precisely the idea behind MERCOSUR. This can be done through SOEs, or private mergers and agreements, or some variant. Second, within the liberalized context, to use regulatory policy and market and factor interventions to improve international compet-

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itiveness. This is the basic idea behind the Chilean regulatory model for energy, and to a lesser extent that of Brazil and Argentina as well. If we now take a fresh look at the international economy through microeconomic eyes, we see nothing like the smooth dependency and modernization view of the macroeconomic side of things. What we see are dynamic, fractured, and highly contested international markets, with incredible levels of complex network ties among buyers, sellers, producers, and government agencies. Very few markets actually operate according to traditional economic assumptions, such as perfect competition, mass production, and easy entry and exit. Even within apparently mass production markets such as steel or automobiles, there are incredible varieties of conditions among the various emerging market niches and factor niches. With appropriate policies and domestic consensus to overcome entry and factor market, there is no reason why developing countries cannot compete in any market. We can easily envision a future in which a Petrobras (Brazil), Pemex (Mexico), Pedevesa (Venezuela), YPF (Argentina), and Endesa (Chile and Spain) compete successfully with any multinational energy corporation from Exxon to Shell.8 The real difference is that in the developed world, industrial policy is used to create and preserve well-paying jobs. The policy may border on inefficient protectionism at times, such as in the case of U.S. steel, but in general the benefits of such interventions are spread more widely throughout the population. The whole information technology revolution, which brought thousands of high-paying jobs and a competitive edge to the United States, has its roots in the research and development subsidies of the U.S. government to higher education and defense spending. The U.S. government developed the Internet! Unfortunately, in Latin America, the gains from industrial policy are concentrated in the hands of a few (often placed unproductively in foreign bank accounts), thus undermining their long-term viability and benefit to the nation, as well as the credibility, capacity, and stability of the state. The real obstacles to development are not external, but internal. NOTE S 1. Thanks to Ron Hira for important comments that improved this chapter. 2. An excellent and somewhat parallel assessment for the British electricity is found in John Surrey, ed., The British Electricity Experiment: Privatization: The Record, the Issues, the Lessons (London: Earthscan, 1996).

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3. Peter Hall’s seminal article on policy change probably best captures this. Peter Hall, “Policy Paradigms, Social Learning and the State,” Comparative Politics 25(3): April 1993. See also Peter Hall, ed., The Political Power of Economic Ideas: Keynesianism across Nations (Princeton: Princeton U. Press, 1989), Peter Gourevitch, Politics in Hard Times: Comparative Responses to International Economic Crises (Ithaca: Cornell U. Press, 1986); and Joan M. Nelson, Economic Crisis and Policy Choice: The Politics of Adjustment in the Third World (Princeton: Princeton U. Press, 1990). 4. See Carlos Rufin, “Institutional Change in the Electricity Industry: A Comparison of Four Latin American Cases,” (n.d.), 13, for more on market share and horizontal and vertical integration restrictions. 5. Though companies are complaining about the economic crisis in Argentina, many of the dominant ones in the region have done spectacularly well. See Mark Mulligan, “Enersis Profits Up 190%,” Financial Times, August 1, 2001. The deregulation experiment has been a spectacular failure in Central America. Even the Inter-American Development Bank (IDB) acknowledges the gross inefficiencies of the private dualistic oligopoly that has taken over the Salvadoran electricity system since deregulation. See Jaime Millan, “Deregulated Power Markets Are Facing Problems on Both Sides of the Border, but Are the Problems Alike?” (Washington: Inter-American Development Bank, n.d.). 6. Rufin, n.d. 11, points out that members of the military and civil service in Chile were actually given subsidies for the purchase of shares in the privatized energy companies. 7. I expand on this analysis in a forthcoming chapter. See Anil Hira, “Games States Play: Regulatory Industrial Policy in International Political Economy,” in Stephen McBride and James Busumtwi-Sam, eds., At the Crossroads: Global Turbulence, Political Economy, and the State (Ashgate, forthcoming). 8. Indeed Pedevesa already owns the large network of Citgo gasoline stations in the United States.

Selected Bibliography

Much of the information for this book derives from two years of field research—interviews with regulatory agencies, companies, nongovernmental organizations, university researchers, and consultants throughout the Southern Cone. Since essential informal information about how markets operate in practice may be prejudicial to the interviewees’ interests, I decided to keep all interview references confidential. While not necessary for every interview, allowing for blanket confidentiality vastly simplified the task. Below is a list of some of the organizations I contacted. A select list of books and other references is also provided. AS SOCIATI O NS ABRACE (Brazil) ACIGRA (Argentina) ADEERA (Argentina) AGUEERA (Argentina)

COMPANI ES AES CMS Energy

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Selected Bibliography

El Paso Energy International Eletrobra´s Enersis Enron Furnas Gener General Electric Light Newmar Perez Companac PSEG

CON FERENCE Latin America Power and Gas Conference, Rio de Janeiro, 2000.

IN TE RNATI O NAL OR G A N I Z AT I ON S CIER (Comisio´n de Integracio´n Ele´ctrica Regional, in Montevideo, Uruguay) OLADE (Organizacion Latinoamericana de Energia, in Quito, Ecuador)

NGO s CEUTA (Uruguay) Illumina (Brazil)

REGULAT O RS ANEEL (Brazil) CAMMESA (Argentina) ONS (Brazil)

UNIV ERSIT I ES Pontificia Universidad Cato´lica de Chile Universidad Federal do Rio de Janeiro (UFRJ), Instituto de Economia, Grupo Energia

Selected Bibliography

103

BIBL IOGRAP HY Abdala, Manuel Angel, and Andres Chambouleyron. “Transmission Investment in Competitive Power Systems: Decentralizing Decisions in Argentina.” In Public Policy for the Private Sector. N. 192. Washington, DC: The World Bank Group, 1999. Amsden, Alice. Asia’s Next Giant: South Korea and Late Industrialization. New York: Oxford U. Press, 1989. Amsden, Alice, and Evanan Romero. “Sustainability of Regulatory Reform in Latin America: A Comparative Analysis of Brazil, Bolivia and Panama.” Latin American Studies Association Conference, Washington, DC, 2001. Andersen, Lykke E., and Mauricio Meza. “The Natural Gas Sector in Bolivia: An Overview.” Bolivia: IISEC-UCB, Documento de Trabajo, Janunary 2001. Badaracco, Ernesto. “Como lograr la equidad.” Energia & Negocios, May 2000, 12–14. ———. “Interconexion de los Mercados Electricos del MERCOSUR.” Paper presented at second Congreso Latinoamericano y del Caribe, Punta del Este, Uruguay, Mar. 27–29, 2000. Baker, Dean, Gerald Epstein, and Robert Pollin, eds. Globalization and Progressive Economic Policy. New York: Cambridge U. Press, 1998. Balbontin, Patricio Rozas. “La crisis electrica en Chile: Antecedents para una evaluacion de la institucionalidad regulatoria.” Serie recursos naturales e infraestructura, no. 5. Santiago: CEPAL. Baldwin, Robert, and Martin Cave. 1999. Understanding Regulation: Theory, Strategy, and Practice. New York: Oxford U. Press. de la Balze, Felipe, comp. El futuro del MERCOSUR: entre la reto´rica y el realismo. Buenos Aires: Associacio´n de Bancos de la Argentina, 2000. Basanes, C. Federico, Eduardo Saavedra, and Raimundo Soto. “Post-Privatization Renegotiation and Disputes in Chile.” Working paper, Inter-American Development Bank, Washington, DC: September 1999. Beato, Paulina, and Carmen Fuente. “Liberalization of the Gas Sector in Latin America: The Experience of Three Countries.” Washington, DC: InterAmerican Development Bank, June 2000. Beck, Ulrich. What Is Globalization? Malden, MA: Polity Press, 2000. Bhagavan, M.R., ed. Reforming the Power Sector in Africa. New York: Zed, 1999. Bondorevsky, Diego, and Diego Petrecolla. “The Structure of Natural Gas Markets in Argentina and Antitrust Issues in Regional Energy Integration.” Washington, DC: IDB, December 2001. Boyer, Robert, and Daniel Drache, eds. States Against Markets: The Limits of Globalization. New York: Routledge, 1996. Campodonico, Humberto. First Europe–Latin America Dialogue on Promotion of Energy Efficiency. Santiago: ECLAC, 2000.

104

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———. “La Industria del gas natural y las modalidades de regulacion en America Latina.” Santiago: CEPAL, 1998. Caporaso, James, and John T.S. Keeler. “The European Community and Regional Integration Theory.” Plenary Address, Third Biennial International Conference of the European Community Studies Association, Washington, DC, May 27–9, 1993. Carnoy, Martin. “Multinationals in a Changing World Economy: Wither the Nation-state?” In The Global Economy in the Information Age, eds. Manuel Castells, S.S. Cohen, and F.H. Cardoso, 95–102. University Park, PA: Pennsylvania State U. Press, 1993. Carr, Barry. “Crossing Borders: Labour Internationalism in the Era of NAFTA.” In Neoliberalism Revisited: Economic Restructuring and Mexico’s Political Future, ed. Gerardo Otero, 209–32. Boulder: Westview, 1996. Cashore, Benjamin, “Policy Networks and Firm Behaviours: Governance Systems and Firm Responses to External Demands for Sustainable Forest Management.” Policy Sciences 33 (2000): 1–30. Chao, Hung-po, and Hillard G. Huntington, eds. Designing Competitive Electricity Markets. Boston: Kluwer, 1998. Chisari, Omar, Antonio Estache, and Carlos Romero. “Winners and Losers from the Privatization and Regulation of Utilities: Lessons from a General Equilibrium Model of Argentina.” The World Bank Economic Review 13, no. 2 (1999): 357–78. Chodorowski, Anthony, and Roberto Carnecir. “South America’s Southern Cone Gas, Power Sectors Taking First Steps toward Energy Integration.” Oil and Gas Journal, October 15, 2001, 68–76. CIER (Comisio´n de Integracio´n Ele´ctrica Regional). “Analisis general de diagno´stico del marco institucional regulatorio para el funcionamiento de un mercado integrado.” In Proyecto CIER 02-Mercados Mayoristas e interconexiones Fase II. Montevideo: CIER, October 1999. ———. 25 An˜os. Montevideo: CIER, 1989. Clifton, Judith. “On the Political Consequences of Privatization: The Case of Telefonos de Mexico.” Bulletin of Latin American Research 19 (2000): 63– 79. Cohen, Marjorie Griffin. “From Public Good to Private Exploitation: GATS and the Restructuring of Canadian Electrical Utilities.” Canadian-American Public Policy 48 (December 2001). Cohn, Theodore H. Global Political Economy: Theory and Practice. New York: Longman, 2000. ———. Power in the Global Era: Grounding Globalization. New York: St. Martin’s Press, 2000.

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105

Coleman, William P.D., and Wyn P. Grant. “Policy Convergence and Policy Feedback: Agricultural Finance Policies in a Globalizing Era.” European Journal of Political Research 34 (1998): 225–47. CountryWatch. “Uruguay, Energy.” Found at http://www.countrywatch.com. Retrieved November 30, 2000. Cowhey, Peter F., and Matthew D. McCubbins. Structure and Policy in Japan and the United States. New York: Cambridge U. Press, 1995. Czamanski, Daniel. Privatization and Restructuring of Electricity Provision. Westport, CT: Praeger, 1999. Diaz-Bautista, Alejandro. Review of Restructuring Chilean Electric and Gas Industries: From Monopolies to Competition. Found at http://www.orion .oac.uci.edu. Retrieved March 3, 2000. Dinar, Ariel, ed. The Political Economy of Water Reforms. New York: Oxford U. Press, 2000. Doner, Richard F., and Eric Hershberg. “Flexible Production and Political Decentralization in the Developing World: Elective Affinities in the Pursuit of Competitiveness?” Studies in Comparative International Development (spring 1999): 45–78. Energy Policy, various issues. “Entrevista a Francisco Ponasso.” Electricidad October, 23, 2000. Estache, Antonio, and Martin Rodriguez-Pardina. “Light and Lightning at the End of the Public Tunnel: The Reform of the Electricity Sector in the Southern Cone.” Draft paper. Washington, DC: World Bank, 1998. Esty, Daniel C., and Damien Geradin, eds. Regulatory Competition and Economic Integration: Comparative Perspectives. New York: Oxford U. Press, 2001. Evans, Peter, Dieter Rueschmeyer, and Theda Skocpol. Bringing the State Back In. New York: Cambridge U. Press, 1985. Export Council for Energy Efficiency. “Market Assessment of Chile: 3. Energy and Electricity in Chile.” (N.d.) Found at http://www.ecee.org. Retrieved October 2000. Fajnzylber, Fernando. Unavoidable Industrial Restructuring in Latin America. Durham: Duke U. Press, 1990. Falk, Richard. “Economic Aspects of Global Civilization: The Unmet Challenges of World Poverty.” Occasional Paper no. 22, Princeton U., 1992. Fischer, Ronald, and Pablo Serra. “Regulating the Electricity Sector in Latin America.” Economia (Fall 2000): 155–218. Foster, C.D. Privatization, Public Ownership and the Regulation of Natural Monopoly. Oxford: Blackwell, 1992. Gereffi, Gary, and Donald Wyman. Manufacturing Miracles: Paths of Industrialization in Latin America and East Asia. Princeton: Princeton U. Press, 1990.

106

Selected Bibliography

Gilbert, Richard J., and Edward P. Kahn, eds. International Comparisons of Electricity Regulation. New York: Cambridge U. Press, 1996. Gilpin, Robert. “The Retreat of the State?” In Strange Power: Shaping the Parameters of International Relations and International Political Economy, eds. Thomas C. Lawton, James N. Rosenau, and Amy C. Verdun. 197–214. Burlington, VT: Ashgate, 2000. Gourevitch, Peter. Politics in Hard Times: Comparative Responses to International Economic Crises. Ithaca: Cornell U. Press, 1986. Guasch, J. Luis, and Robert W. Hahn. “The Costs and Benefits of Regulation: Implications for Developing Countries.” The World Bank Research Observer 14:1 (February 1999): 137–58. Guasch, J. Luis, and Pablo Spiller. Managing the Regulatory Process: Design, Concepts, Issues, and the Latin American and Caribbean Story. Washington, DC: World Bank, 1999. Haas, Ernst. “The Study of Regional Integration: Reflections on the Joy and Anguish of Pretheorizing.” International Organization 24 (1970): 622– 28. Haggard, Stephan. “The Political Economy of Regionalism in the Western Hemisphere.” In The Post-NAFTA Political Economy: Mexico and the Western Hemisphere, ed. Carol Wise, 302–59. University Park: Penn State U. Press, 1998. Hall, Peter. “Policy Paradigms, Social Learning and the State.” Comparative Politics 25(3): April 1993. ———, ed., The Political Power of Economic Ideas: Keynesianism across Nations. Princeton: Princeton U. Press, 1989. Heath, Jonathan. “The Impact of Mexico’s Trade Liberalization: Jobs, Productivity, and Structural Change.” In The Post-NAFTA Political Economy: Mexico and the Western Hemisphere, ed. Carol Wise, 171–200. University Park: Penn State U. Press, 1998. Heller, William B., and Mathew McCubbins. “Political Institutions and Economic Development: The Case of Electric Utility Regulation in Argentina and Chile.” In Presidents, Parliaments, and Policy, eds. Stephan Haggard and Mathew D. McCubbin, 229–55. New York: Cambridge U. Press, 2000. Hira, Anil. “Deconstructing Integration: From Europe to East Asia.” National Social Science Perspectives Journal 14, 3 (1998): 59–71. ———. “Evaluacio´n Polı´tica de la Integracio´n Ele´ctrica en el Cono Sur.” Revista CIER no. 26, An˜o X (June/July 2001). ———. Ideas and Economic Policy in Latin America: Regional, National, and Organizational Case Studies. Westport, CT: Greenwood, 1998.

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107

———. “Potential Political Obstacles to Energy Integration in MERCOSUR.” Paper presented at Latin American Power and Gas Conference, Rio de Janeiro, 2001. Hira, Anil, and Libardo Amaya. “Does Energy Integrate? (A Comparison of Energy Integration in Central America, MERCOSUR, the E.U., and Nordpool).” In Energy Policy. Forthcoming. Hira, Anil, and Ron Hira. “The New Institutionalism: Contradictory Notions of Change.” The American Journal of Economics and Sociology 59, no. 2 (April 2000): 267–82. Hira, Anil, David Huxtable, and Alexandre Leger. “Deregulation and Democracy.” Forthcoming. ———. “Games States Play: Regulatory Industrial Policy in International Political Economy.” In Stephen McBride and James Busumtwi-Sam, eds. At the Crossroads: Global Turbulence, Political Economy, and the State. Ashgate. Forthcoming. Hirst, Paul. “The Global Economy—Myths and Realities.” International Affairs 73(1997): 409–25. Honty, Gerardo. “El sector energetico Uruguay y la banca multilateral,” Montevideo: CEUTA, 2000. Found at http//www.sicoat.com.uy/ceuta/mdb info.htm. Ilumina. Found at http://www.ilumina.org.br. INFOPETRO. (Bulletin of Brazilian Oil and Gas Industry). Found at http:// www.ie.ufrj.br/infopetro. Infrastructure Brazil. Found at http://www.infraestructurabrasil.gov.br. Inter-American Development Bank (IDB). Profiles of Power Sector Reforms in Selected Latin American and Caribbean Countries. Washington, DC: IDB, 1999. Integracion Energetica en el Cono Sur. 1996. Buenos Aires: IDB, INTAL. International Energy Agency (IEA). Electricity Market Reform: An IEA Handbook. Paris: IEA, 1999. International Energy Agency (IEA). Regulatory Reform in Argentina’s Natural Gas Sector. Paris: IEA, 1999. Johnson, Chalmers, Laura D’Andrea Tyson, and John Zysman, eds. Politics and Productivity: The Real Story of Why Japan Works. Cambridge, MA: Ballinger, 1989. The Journal of Energy and Development, various issues. Juris, Andrej. “Competition in the Natural Gas Industry.” World Bank, March 1998, n. 137. ———. “The Emergence of Markets in the Natural Gas Industry.” N.d. Karl, Terry Lynn. The Paradox of Plenty: Oil Booms and Petro-States. Berkeley: U. of California Press, 1997.

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Katzenstein, Peter. Small States in World Markets. Ithaca: Cornell U. Press, 1985. Keohane, Robert O., and Joseph S. Nye Jr. Transnational Relations and World Politics. Cambridge, MA: Harvard U. Press, 1972. Krugman, Paul, ed. Strategic Trade Policy and the New International Economics. Cambridge, MA: MIT Press, 1986. Laı¨di, Zaki. A World Without Meaning: The Crisis of Meaning in International Politics, trans. June Burnham and Jenny Coulon. New York: Routledge, 1998. Levy, Brian, and Pablo T. Spiller. Regulations, Institutions, and Commitment. New York: Cambridge U. Press, 1996. Linhares Pires, Jose Claudio. “Capacity, Efficiency and Contemporary Regulatory Approaches in the Brazilian Energy Sector: The Experiences of ANEEL and ANP.” Paper for “Challenges and Opportunities Facing the Brazilian Energy Sector conference,” Oxford University, December 6, 1999. ———. “Desafios da reestructuracao do setor electrico Brasileiro.” BNDES, Textos para Discussao 76 (March 2000,). Found at http://www.bndesigov.bt. Majone, Giandomenico. Regulating Europe. New York: Routledge, 1996. Manzetti, Luigi, ed. Regulatory Policy in Latin America: Post-Privatization Realities. Miami: North-South Center Press, 2000. Maxfield, Sylvia, and Ben Ross Schneider, eds. Business and the State in Developing Countries. Ithaca: Cornell U. Press, 1997. Millan, Jaime. “Deregulated Power Markets Are Facing Problems on Both Sides of the Border, but Are the Problems Alike?” Washington, DC: InterAmerican Development Bank, n.d. Milner, Helen. Resisting Protectionism: Global Industries and the Politics of International Trade. Princeton: Princeton U. Press, 1988. Mittleman, James H., ed. 2000. The Globalization Syndrome: Transformation and Resistance. Princeton: Princeton University Press. Morande, Felipe G., and Ricardo Raineri B., eds. (De)regulation and Competition: The Electric Industry in Chile. Santiago: ILADES, 1997. Murillo, Victoria M. “From Populism to Neoliberalism: Labor Unions and Market Reforms in Latin America.” World Politics 52 (January 2000): 135– 74. Naim, Moises, and Joseph S. Tulchin, eds. Competition Policy, Deregulation, and Modernization in Latin America. Boulder: Lynne Rienner, 1999. Nau, Henry. The Myth of America’s Decline: Leading the World Economy into the 1990s. New York: Oxford U. Press, 1990. Nelson, Joan M. Economic Crisis and Policy Choice: the Politics of Adjustment in the Third World. Princeton: Princeton U. Press, 1990. Noll, Roger G., and Bruce M. Owen. The Political Economy of Deregulation: Interest Groups in the Regulatory Process. Washington, DC: AEI, 1983.

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109

O’Brien, Robert, Anne Marie Goetz, Jan Aart Scholte, and Marc Williams. Contesting Global Governance: Multilateral Economic Institutions and Global Social Movements. New York: Cambridge U. Press, 2000. OECD (Organization for Economic Cooperation and Development). Spotlight on Public Support to Industry. Paris: OECD, 1998. OLADE (Organizacion Latinoamericana de Energia). Interconexiones energeticas e integracion regional en America Latina y el Caribe. Quito: OLADE, 1999. de Olveira, Adilson. “The Changing Brazilian Electricity Market.” La Jolla: Institute of the Americas, November 1999. Found at http://www .iamericas.org. Retrieved November 23, 2000. ———. Energia e desenvolvimento sustentavel. Rio de Janeiro: UFRJ-Instituto de Economia, 1998. Otero, Gerardo, ed. Neoliberalism Revisited: Economic Restructuring and Mexico’s Political Future. Boulder: Westview, 1996. Piore, Michael, and Charles Sabel. The Second Industrial Divide: Possibilities for Prosperity. New York: Basic Books, 1984. Polanyi, Karl. The Great Transformation. Boston: Beacon Press, 1957. Pontificia Universidad Catolica de Chile. Engineering Department’s Web site. Found at http://www2.ing.puc.cl. Porter, Michael. The Competitive Advantage of Nations. New York: Free Press, 1990. Prakash, Aseem, and Jeffrey A. Hart. Coping with Globalization. New York: Routledge, 2000. Prebisch, Raul. “The Economic Development of Latin America: Its Principal Problems.” Economic Bulletin for Latin America 7, 1 (February 1962): 1– 22. Queiroz Pinto Junior, Helder. “Financement, investissement et mode d’organisation des industries electriques: Le cas des pays d’Amerique Latine.” Ph.D. diss., Universite Pierre Mendes-France de Grenoble, 1993. Rodrik, Dani. Has Globalization Gone Too Far? Washington, DC: Institute for International Economics, 1997. Roett, Riordan, ed. MERCOSUR: Regional Integration, World Markets. Boulder: Lynne Rienner, 1999. Rogowski, Ronald. Commerce and Coalitions: How Trade Affects Domestic Political Alignments. Princeton: Princeton U. Press, 1989. Rozas Balbontin, Patricio. La Crisis electrica en Chile: Antecedents para una evaluacion de la institucionalidad regulatoria. Serie recursos naturals e infraestructura, no. 5. Santiago: CEPAL, 1999. Rudnik, Hugh. Pontificia Universidad Cato´lica de Chile (PUC) Web page on South American power. Found at http://www.2.ing.puc.cl/power/. Rufin, Carlos. “Institutional Change in the Electricity Industry: A Comparison of Four Latin American Cases.” N.d.

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———. “The Political Economy of Institutional Change in the Electricity Supply Industry.” Ph.D. diss., Harvard University, 2000. Rufin, Carlos, and Evanan Romero. “Sustainability of Regulatory Reform in Latin America: A Comparative Analysis of Brazil, Bolivia, and Panama.” Paper for LASA Conference, Washington, DC, September 11, 2001. Sagaris, Lake, with Elizabeth Love. “ENERSIS: Chile’s Electric Powerhouse Prowls Abroad.” Business Week, October 27, 1997. Found at http:// www.businessweek.com. Shafer, D. Michael. Winners and Losers: How Sectors Shape the Developmental Prospects of States. Ithaca: Cornell U. Press, 1994. Snyder, Richard. “After Neoliberalism: the Politics of Reregulation in Mexico.” World Politics, 51 (January 1999): 173–204. Spiller, Pablo T., and Luis Viana Martorell. “How Should It be Done? Electricity Regulation in Argentina, Brazil, Uruguay, and Chile.” In International Comparisons of Electricity Regulation, eds. Richard J. Gilbert and Edward P. Kahn, 112–17. New York: Cambridge U. Press, 1996. Stern, Laura. “Market Distortions in the Chilean Electric Generation Sector.” The Journal of Project Finance 5, no. 3 (1999): 41–52. Surrey, John, ed. The British Electricity Experiment: Privatization: The Record, the Issues, the Lessons. London: Earthscan, 1996. Terra Prates, Jean-Paul. “Brazil’s Three Natural Gas Systems: Sources, Markets, Regulations, and Business Perspectives.” Oil and Gas Journal (August 9, 1999), 54–63. Thorp, Rosemary. Progress Poverty, and Exclusion: An Economic History of Latin America in the Twentieth Century, Washington, DC: IDB, 1998. Tyson, Laura D’Andrea, William T. Dickens, and John Zysman, eds. The Dynamics of Trade and Employment. Cambridge, MA: Ballinger Pub. Co., 1988. UNDP (United Nations Development Programme) and ESMAP (World Bank Energy Sector Management Assistance Programme). “Brazil: Hydro and Thermal Power Sector Study.” Report No. 197/97. Washington, DC: World Bank, 1997. U.S. EIA (Energy Information Administration). “Britain” Chapter in Privatization and the Globalization of Energy Markets. Washington, DC: USEIA, 2000. ———. “Electricity Reform Abroad and U.S. Investment: 4. The Transformation of Argentina’s Electricity Industry.” N.d. Found at http://www.eia .doe.gov. USITC (U.S. International Trade Commission). “Natural Gas Services: Recent Reforms in Selected Markets.” Investigation No. 332–426. USITC Publication 3458. Washington, DC: October 2001.

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Index

Argentina, 46–49, 65–66, 82, 97 Bolivia, 53–55, 69 Brazil, 49–52, 82, 97 Chile, 21, 37, 42–46, 65–66, 69, 96; drought and energy crisis in, 30, 44–45 Consultants (role of), 8, 29–30, 50 Debt. See Liberalization Deregulation, definition of, 8–10 Distribution. See Electricity Distributional consequences (of deregulation and integration), 65, 96 Electricity (market characteristics), 21–25, 66–67; problems in transmission, 23, 45, 48 Employment, 26, 29, 57, 81–82

Endesa (Chilean-Spanish Energy company), 42–43, 45–46, 58, 69, 71, 83, 99 Environment, 22, 27–28, 68, 81, 88–89, 94 European Union, 6 Evaluation of Southern Cone (SoCo) electricity, 58–70 Gas. See Natural gas Generation. See Electricity Globalization, 1–10, 96–99 Import-substituting industrialization (ISI) period, 20 Industrial policy, 6; in globalization, 96–99 Information (transactions costs), 25 Integration, electricity and gas, 31–37, 77–90; existing agreements, 79–80 Integration theory, 6

114

International organizations, role of, 8, 35, 36, 83 Investment, 27. See also Privatization Liberalization (economic), neoliberalism, 2, 6, 19–21, 26–32, 47, 50 Local (state or province)-national relations, 29, 32, 36 Market concentration, 26, 47–48, 50–52, 54–55, 58, 60–61, 60–65, 84, 87–88, 95–97 MERCOSUR (common market of South America), 1, 7, 10, 35, 37, 77–90, 98 NAFTA (North American Free Trade Agreement), 7, 77–78 Natural gas, 22, 46, 57–58, 82; Bolivia-Brazil pipeline, 53 Neoliberalism. See Liberalization NGOs (non-governmental organizations), 5, 27–30, 81 Paraguay, 55, 82 Petrobras (Brazilian energy company), 49, 52, 66, 69, 85–86, 87, 97, 99 Polanyi, Karl, 2, 70 Pricing, 23–26, 33, 44–45, 57–65, 68–70

Index

Privatization, 20–22, 28, 68, 82–83; in Argentina, 46–47; in Brazil, 50; in Chile, 42–43; in Uruguay, 56 Public opinion, 30, 56 Regulatory policy. See Deregulation Reliability, 23 Residential (electricity customers), 22, 24–25, 30, 45, 51, 63–68 Sectoral policy, sectors, 17–19 Shafer, D. Michael, 17–18 State autonomy, 1–10, 68–70 State-owned enterprises (SOEs), 20, 25–6, 28, 31, 49–50, 65, 68–70, 94, 98; in Argentina, 46. See also Privatization Subsidization. See Pricing Transactions costs. See Information Transmission. See Electricity Unions, 29, 81, 89; in Chile, 43, 83; in Uruguay, 57. See also Employment Uruguay, 55–57, 82 YPF-Repsol (Yacimientos Petroliferos Fiscales, Argentine-Spanish energy company), 48–49, 58, 66, 69, 72, 87, 99

About the Author ANIL HIRA is Assistant Professor in the Department of Political Science and Latin American Studies, Simon Fraser University. Among his earlier publications is Ideas and Economic Policy in Latin America: Regional, National, and Organizational Case Studies (Greenwood Press, 1998).