SANTIAGO, Chile, April 12 (UPI) -- Spanish electricity giant Endesa España is spearheading a wave of criticism against the Chilean government for what Spanish investors deem is its meddling role in the energy industry through an excess of regulation and fixed prices.
Endesa España executives met Friday with Spanish Interior Minister Jose Miguel Insulza at the La Moneda government palace to express their dissatisfaction over diverse issues that in their view are jeopardizing further investment in Chile.
"Chile still needs investment in electric infrastructure and, because of this, it is very important that the incentives are adequate," company President Rodolfo Martin Villa said.
Villa acknowledged that one of his main concerns was the prompt derogation of the controversial Chilean decree 88, which forces electricity generators to sell energy to distributors who have not managed to hire a provider. Fresh in the memory of Chilean authorities is the 1999 summer drought that created a severe energy shortage in the country, one of several such crisis that affect the country every few years. Preventing another such crisis, claims the Chilean government, led them to pass the decree in May.
Spanish executives, however, are unimpressed and have made repeated calls for the effective liberalization of the industry. Decree 88 was the target of an administrative complaint filed by Endesa España in March asking for its revocation.
The complaint fell on deaf ears as Economy Minister Jorge Rodriguez said Friday the decree would not be modified given that it helps the country meet its energy needs. Rodriguez complained bitterly about the fact that recent bids by electricity distributor companies have failed to attract prospective generators.
"When we see that the problem is solved by the market, we will maybe put an end to the decree," Rodriguez said.
Chile's electricity generation is highly dependent on rainfall levels. Hydroelectric dams produce 60 percent of the energy in the country's Central Interconnected Power System or SIC, which delivers electricity to 93 percent of the population. Accordingly, south-central Chile's heavy rainfall and extensive rivers make hydroelectricity the country's cheapest energy source.
Rodriguez' words came on the wake of the harsh criticism against the government Thursday at the annual shareholders meeting of local electricity companies Endesa Chile and Enersis, both controlled by Endesa España.
Hector Lopez -- general manager of Endesa Chile -- threatened to sue the economy minister if the complaint did not succeed. Lopez added that opposing the decree was not about profits or losses, but a question of market organization principles, since "no one can force (a company) to sell its product to those who don't want it, and at a price fixed by a third party."
Analysts have claimed that one of the main factors deterring generator companies from striking deals with distributors is an amendment to Chile's General Law of Electricity Services, which forces the firms to compensate their clients financially in case of a drought such as the one in 1999. At the time, the crisis raised the voices of many politicians and government officials denouncing the lack of legal protection for consumers in Chile if electricity companies failed to provide their service.
Although the amendment was passed three years ago, electricity companies have periodically criticized it and Thursday's meeting was no exception.
Endesa Chile President Pablo Yrarrazaval said that the distributors' lack of suppliers largely owed to the "risks" posed by the law's amendment, "which forces us to compensate clients in case of extreme droughts."
The electricity industry has expressed worries in recent months that Chile may be headed for an electricity crisis. The National Energy Commission, CNE, fears it will be forced to ration electricity, especially during 2002 and 2003. The qualms were intensified a few weeks ago, when AES Corp. executives retracted a statement from last year claiming the company planned to invest over $1 billion in Chile's electricity industry. Rumors of an eventual sale of AES' main asset, the electricity generator company Gener, triggered more speculation on Chile's severe lack of investment to meet its future energy needs.
Curtailing "hydroelectric investment is worrying if one considers that, in five more years, almost half of Chile's supply will depend from gas coming from Argentina," Yrarrazaval added.
But the Spaniards' criticism of the Chilean regulatory system does not end here. Since users of low electricity consumption are being provided by a highly concentrated market -- dominated by Endesa España -- and the users lack power of negotiation, the government deems it necessary to fix their tariffs. One of them is the so-called knot price, precio de nudo, the amount in which generators sell their energy to distributors.
May marks the enactment of a new knot price adjustment, which authorities have already said will be cut by nearly 5 percent. Lopez said that "if we talk about a deregulated and liberalized market" then "the price should be fixed by the market." The executive added that if in other Chilean industries, such as the state-owned copper entity Codelco could fix prices, electricity industry players are also entitled to do so. Lopez warned that every government adjustment of the knot price directly affected the company's future investment decisions.
The Endesa España-Chilean government quarrel subsists in other fronts. Their local asset Enersis is under scrutiny from the Anti-Monopoly Committee for vertical integration because the company both generates and distributes electricity. A verdict is expected soon and has the potential to impact not only on the Spanish company but also future investments in the country.
Villa raised the issue of foreign capital, claiming Chile's fiscal policy inhibited their plans to make the country their investment platform for Latin America. When an international investor places capital in Chile and from there invests in other markets in the region, he ends up paying taxes in at least three different places: his country of origin, Chile, and the country where he invested. Villa urged the authorities to review their taxation policies, an issue he discussed during his Friday visit.
The rift marks the latest in an escalade of conflicts between the Chilean government and Spanish investors. Last month, the country's largest telephone company Telefonica CTC Chile -- owned by the Spanish Telefonica -- filed a $274 million lawsuit against the Chilean government. The company, which controls almost 90 percent of the fixed telephonic market in the country, claims a government tariff decree for the 1999-2004 period is hurting its financial prospects.
The hostile scenario led Luis Cid -- president of the Spanish Chamber of Commerce of Chile -- to claim a few days ago that his country's companies were "worried" over the future of their Chilean investments.
In spite of the negative appraisals, Villa reaffirmed his commitment Friday to make Chile the strategic capital of their Latin American electricity business.
"We maintain this commitment and plan to continue doing so," Villa said.
Spain was Chile's main source of foreign capital during the last decade, with several of its companies effectively positioning themselves as controllers of the local telephone, electricity, and water industries.
