Energy Information Administratin


Privatization and the Globalization of Energy Markets

5. Privatization and the Genesis of the Multinational Power Company: Underlying Factors and Regional Trends

 

Financial Developments in Global Power

The Convergence of Electricity and Natural Gas

Regional Developments

The United Kingdom

Independent Power Producers

Nuclear Power Privatization

Natural Gas Privatization in the United Kingdom

Finland, Norway, and Sweden

France, Italy, and Portugal

Hungary, Poland, Russia, and the Czech Republic

Australia

India

Pakistan

China, New Zealand, Indonesia, the Phillippines, and Morocco

Argentina

Bolivia

Chile

Colombia and Peru

Brazil, Mexico, and Venezuela

The Dominican Republic and Trinidad

Financial Developments in Global Power

Electric power is expected to be the fastest-growing source of end-use energy supply throughout the world over the next two decades. To meet global power projections, it is estimated that over $1 trillion will have to be spent during the next 10 years {see Endnote 194}. The electric power industry has undergone a substantial degree of privatization in a number of countries over the past few years. Power generation growth is expected to be particularly strong in the rapidly growing economies of Asia, with China leading the way. The reasons for electric utility privatization are numerous and vary from country to country.

Some of the more evident reasons include the following:

Electricity demand is expected to grow fastest in the developing nations, particularly those with rapidly growing populations and economies. For developing nations, privatization is one means of obtaining badly needed foreign capital. It is also a means of transferring western technology to second and third world countries.

Privatization of formerly state-owned electric power assets has opened up enormous investment opportunities. For foreign investors, investment in overseas electricity assets offers opportunities to achieve potentially higher returns and, in many cases, to realize greater growth opportunities than are available at home.

The financing of power projects around the world has changed in recent years. Non-private sources of investment funds have grown increasingly scarce, and the critical role such publicly-financed institutions, such as the World Bank, have played in financing electrical projects has diminished significantly. However, several new entrants in financing of overseas electric power investment have recently emerged--particularly in the area of equity finance. Some of these new sources of capital include the world's major petroleum companies, natural gas pipeline companies, electric utilities, and also some of the world's major construction and power equipment manufacturing companies. Construction companies are increasingly setting up project financing departments and committing their own capital to financing power projects {see Endnote 195}. Investors based in the United States have been the leading source of capital for many of these projects. Some U.S. mutual funds have been started for the exclusive purpose of investing in Latin American power production. The growth trend in U.S. direct investment in foreign electric utilities (and similar services) has clearly been upward in contrast to U.S. direct investment abroad in petroleum {see Endnote 196}.

There are a number of ways to privatize electric power. One involves the sale of state-owned electric power assets. Another involves allowing less restricted or unrestricted investment in new power assets--the independent power project. Arrangements whereby a foreign company builds a power unit and operates the unit for an agreed-upon number of years before transferring ownership to the host country has been another important vehicle for financing electric power. This latter investment arrangement is commonly referred to as a build, operate, transfer agreement, or BOT. In several nations, rate reform has also played a critical role in encouraging such non-utility electric power investments.

In several cases discussed later in this chapter, privatization has involved foreign utilities purchasing one or more utilities in other countries. Some privatization efforts have involved consortiums of foreign and domestic companies. Joint ventures with host nation companies have been another avenue of privatization. In other cases, foreign companies or investors have purchased shares in newly-privatized electric utilities. In a few cases, recently-privatized companies have acquired ownership interests in other recently-privatized companies.

The Convergence of Electricity and Natural Gas

Privatization has also resulted in a growing convergence of petroleum-related activities and electric power-related activities. The growing interconnection between petroleum companies (particularly those with substantial natural gas production and/or distribution activities) and electric power generation stems from a number of developments. In certain regions, natural gas is becoming the fuel of choice for new electricity generation projects, in part, because of the relative environmental advantage that natural gas has over coal or oil. The much improved efficiency of gas-fired electricity generation units over the last several years has also improved natural gas's relative competitiveness as a fuel for the generation of electricity. Furthermore, in several countries natural gas deregulation has accompanied the deregulation of electric power. In the aftermath of several prominent deregulatory efforts in the U.S. natural gas market--culminating in the Federal Energy Regulatory Commission's (FERC's) final deregulatory push in 1993, through the FERC Omnibus Order 636--U.S. natural gas pipeline companies have become particularly well-suited to enter newly-opened markets in a variety of international regions undergoing a deregulatory and transitional phase. The sections that follow review developments in power generation, transmission, and distribution privatizations as they have occurred across international regions.

Regional Developments

The privatization of electric utilities has occurred and is continuing to occur in both developing and developed countries. Although varying extensively in degree and method, countries as different as India and the United States have exposed their electric power generation industries to greater market forces. Chile has led the way with electric utility privatization in the late 1980's, followed by the United Kingdom. Currently, most Latin American countries are privatizing their electric power industries to some extent. Prominent electric power privatization efforts also are currently underway in Australia, Canada, China, Scandinavian countries, India, Indonesia, Morocco, Pakistan, the Philippines, and Eastern Europe. A brief discussion of the different regions is appropriate to highlight their differences and similarities in electricity privatization.

Some countries in OECD Europe have taken steps to introduce elements of competition in their power industries. Others are in the process of formulating regulatory changes that will ensure a move toward privatization and an overall restructuring of their electricity markets. Currently, the European Union energy ministers are working on plans to create an internal electricity market, but progress has been slow due to resistance from some state-owned electricity monopolies. OECD European nations currently undergoing major privatization efforts include the United Kingdom, Finland, Norway, Sweden, and Portugal. These efforts vary considerably across countries and are for the most part still in a transitional phase {see Endnote 197}.

Similarly, the shape of the electric power industry is changing in Canada. In some jurisdictions, consideration is being given to unbundling electricity supply to its three principal functions--generation, transmission, and distribution. Privatization of North America's largest power utility, Hydro Ontario, is also being considered, excluding its nuclear generating plants.

Of all world regions, Asia is expected to show the most rapid increase in economic growth and electricity consumption over the next few decades. This region is also expected to lead the way in the level of independent power producers activity. While non-OECD Asia accounted for only 14 percent of total world electricity consumption in 1992, it is expected to account for nearly one-third of total demand growth between now and 2010. China, India, and Australia are, respectively, Asia and Oceania's largest economies, as well as the next largest consumers of electricity after Japan (an OECD country). They also account for some of the largest foreign investments in electricity generation overseas. All three nations have undergone significant attempts at electricity privatization. Some of the relatively smaller economies such as Indonesia, New Zealand, Pakistan, and the Phillippines, have also undergone significant privatization efforts.

Africa, too, is undergoing changes in its electricity industry structure. Morocco is undertaking the privatization of its electricity industry, much as the smaller countries of Asia and Oceania.

Privatization efforts are generally sweeping Latin America and the electricity industry is no exception. Many Latin America nations have undertaken economic and political reforms of historic dimensions in recent years. Democratic government and free market economics have been central to these reforms. Both have done much to restore Latin America's creditworthiness. There are several reasons for the current wave of electricity privatization in Latin America. Poor economic performance during the 1980s left many Latin American countries with deteriorating electricity infrastructures and no increase in generation capacity despite rapid population growth.

Latin America's growing economies and growing populations are expected to continue to stimulate expansions in electricity generation capacity well into the future. In the first half of the 1990's, most Latin American countries experienced increased economic growth rates. Long-term economic growth prospects also improved. Future economic growth is very dependent on Latin America's expanding its power-generating capacity. Expansion of access to electricity is also important as currently 30 percent of the population of Central and South America have no access to the power grid {see Endnote 198}. Forecasts of electricity demand predict a 2.6-percent annual growth in Latin America well into the next century {see Endnote 199}.

Latin America has many primary resources that can be used to generate electricity, including water for hydroelectric generation, and coal, natural gas, and oil for steam-fired generation. Historically, hydroelectric generation has been the primary method of generating electricity in Latin America {see Endnote 200}. However, new power generation projects seem to indicate a movement to natural gas and coal. As of 1994, 30 percent of electricity generation in all of Latin America was fueled by natural gas {see Endnote 201}. Concurrent and related to the movement to natural gas-fired electricity generation has been increased investment in natural gas pipelines (see the box "Latin America's Emerging Regional Natural Gas Pipeline Network").

Electricity privatization is different, depending on the particular country on which one focuses. However, some countries are more similar than others. While some countries have sought aggressive privatization and reform of their electric power sectors, others have been slow to reform. Thus, a review of electricity privatization efforts on a nation-by-nation basis is provided to demonstrate the differences and similarities between countries.

The United Kingdom

Among developed economies, the United Kingdom's electric utility industry privatization efforts have been the first, largest, and most ambitious thus far. The United Kingdom began to privatize its power industry in 1990 and completed the final phase of privatization in July of 1996 {see Endnote 202}. Privatization of electricity in Great Britain has occurred in the context of a wholesale privatization of several other state-owned industries. The 1980's saw a wave of privatization by the United Kingdom, beginning in 1981, when British Aerospace was auctioned off, followed by British Telecommunications in 1984. Soon afterwards, there were privatizations of British Gas (1986) (see the box entitled "Natural Gas Privatization in the United Kingdom"), British Airways (1987), British Steel (1988), and Britain's water utilities (1989). More recently, British Coal was privatized in 1995, and British Rail in 1996. The sale of the Post Office is also being considered. Also, in a series of transactions starting in 1979, the British government began to sell off its ownership in British Petroleum, culminating in the government's sale of its remaining 2-percent share in 1995 (see Chapter 2 for a discussion on the privatization of British Petroleum). Through all of 1995, the UK had raised over $95 billion through privatization {see Endnote 203}.

Prior to privatization, in England and Wales, the nationalized Central Electricity Generating Board (CEGB) owned all power stations and transmission grids. On the national level, the initial steps toward privatization involved the restructuring of the CEGB into four separate companies, still owned by the British government. Later, the two power generation companies, PowerGen and National Power, both issued equity shares in 1990. National Power is the larger of the two companies and accounts for nearly a quarter of UK electricity generating capacity {see Endnote 204}. The national electric transmission grid is managed by the National Grid Company which was initially owned by twelve regional electricity distribution companies but became an independent company in 1995. The 12 regional companies are: East Midlands Electricity, Eastern Group, London Electricity, Manweb, Midlands Electricity, Northern Electric, Norweb, Seeboard, Southern Electric, South Wales Electric, South Western Electricity, and Yorkshire Electricity. The fourth company, Nuclear Electric, (which consists of eight nuclear-fired electricity generating plants) was privatized in July 1996 as the company British Energy {see Endnote 205}. It should be noted that privatization did not mean complete deregulation and in the aftermath of privatization retail rates were still regulated and wholesale rates frozen.

In Scotland, privatization involved the creation of two integrated companies, Scottish Hydro-Electric and Scottish Power (a distribution and generation company for Scotland), and in Northern Ireland, Northern Ireland Electricity was formed.

Soon after privatization, the structure of Britain's electric industry began to change dramatically, particularly at the distribution stage. Through a series of mergers and acquisitions, the twelve regional electricity distribution companies, as a group, became more vertically integrated. Both National Power and PowerGen (the two newly-created generation companies) placed bids on distribution companies. Foreign electricity companies, particularly from the United States, also placed bids on both the power and distribution companies.

Since going public, several of the 12 regional distribution companies and one power company have been takeover targets. The largest foreign acquisition of a UK electric utility thus far has been the purchase of Midlands Electricity (one of the regional distribution companies) by the U.S. companies General Public Utilities and Cinergy for $2.6 billion. The next largest involved the purchase of another regional electricity distribution company (Seeboard) for $2.5 billion by Central and South West of Dallas, Texas. Southern Company, of Atlanta, Georgia (the second largest utility in the United States), purchased South Western Electricity, another regional electricity distribution company, for $1.7 billion. Meanwhile, Prudential took a 4.9-percent equity stake in Yorkshire Electricity, yet another regional distribution company.

There has also been some internal consolidation of Great Britain's electric power and distribution industries and integration with the UK's recently-privatized water utilities. Both Norweb and South Wales Electricity were acquired/merged with local water power utilities, while Scottish Power acquired Manweb. North West Water, which purchased Norweb, outbid the U.S. utilities Houston Industries and Central and South West Corp. In addition, Southern Electric outbid Scottish Power to acquire Southern Water PLC for $2.4 billion {see Endnote 206}. The UK's Southern Electric is the second largest electricity distribution company in England and Wales. With its acquisition of Southern Water and its recently-obtained license to become a natural gas distributor, it could become the first full service regional utility
{see
Endnote 207}.

In early 1996, there were several attempted acquisitions which were in the end rejected by the British government. Among recent takeover targets, those involving Britain's electrical power generation assets have been among the most controversial. National Power PLC had attempted a takeover of Southern Electric PLC, the second largest regional distribution company in the United Kingdom, for $4.4 billion {see Endnote 208}. In turn, National Power was a takeover target of the U.S.-based Southern Company, which had just earlier purchased South Western Electricity. PowerGen, the other major generation company, had mounted a takeover attempt of Midlands Electricity. However, the British government blocked the proposed merger of Southern Electric and National Power, and the purchase of Midlands Electricity by PowerGen because of concerns about maintaining competitive markets. Had the Southern Company/National Power merger and the National Power/Southern Electric acquisition gone through, Southern Company would have owned two of the twelve regional distribution companies (with neighboring territories) along with the largest generation company {see Endnote 209}. A U.S. company would then have become both the largest power generation company and the largest power distribution company in the United Kingdom.

Meanwhile, Hanson Corporation's electric distribution subsidiary, Eastern Group, has purchased power plants from both National Power and PowerGen, making the Eastern Group an integrated electricity company. (Hanson Corporation is a UK-based conglomerate with interests in U.S. and Australian coal mining.) The Eastern Group is the largest regional distribution company in the UK and accounts for roughly 10 percent of the national electricity distribution market.

See Electricity Reform in UK

Independent Power Producers

There have also been several independent power investments in England and Wales in recent years involving both U.S. and other foreign investors (Table 5). These include an investment by Enron in 1991 in the 1,875-megawatt (MW) Teesside power facility, the largest gas-fired plant in the world {see Endnote 210}. Other independent electric power generation investments include: an investment by Central and South West (Seeboard's parent company) and AES, both of which are in the United States, in a 660-MW natural gas-fired power plant. Also, Southern California Edison's (SCE Corp.) affiliate Mission Energy acquired First Hdro Company and its Derwent power project.

There have also been some foreign investments in Northern Ireland following the auction of all power stations to private companies in March 1992. Two coal-fired plants were bought by NIGEN, a consortium of the U.S. company AES and the Belgian company Tractabel. In addition, British Gas bought an oil-fired plant {see Endnote 211}.

Nuclear Power Privatization

One of the more controversial aspects of electricity privatization in the United Kingdom concerned the government's sale of nuclear power plants. Nuclear power privatization has been a controversial issue in several other countries, in addition to Britain, most notably in Argentina and in Canada. In July 1996, eight of Britain's nuclear power plants were consolidated into one company, British Energy, and then sold off to the public. The privatization of British Energy results in the first publicly-traded company whose entire asset base consists of nuclear power facilities. An earlier attempt at privatization of Britain's nuclear power industry was made in 1990. However, that attempt failed largely as a result of the financial communities' concerns over the safety and liability of nuclear power plants.

As a result of such concerns, during its initial offering, the $2.1 billion value the market placed on British Energy proved even less than the cost of building its last nuclear power plant. Further, since the flotation of shares, the market value has dropped even further. In addition to safety and liability concerns, the relatively high operating costs of British Energy has raised doubts over the company's ability to compete--particularly in the new competitive free market atmosphere.

Natural Gas Privatization in the United Kingdom

The privatization of the British natural gas industry is both coincident to and strongly related to the privatization of electricity in the United Kingdom. The recent convergence of Britain's electric and natural gas industries has drawn a significant amount of attention from abroad as a possible paradigm of what might result in other countries from totally privatized energy markets.

Natural gas plays an important and growing role in UK energy supply. Between 1989 and 1994, coal production in the United Kingdom had fallen by half, while natural gas production increased 56 percent {see Endnote 212}. Since 1970, the UK's production of natural gas has grown sixfold {see Endnote 213}. Consumption patterns of both fuels has largely paralleled demand. Between 1989 and 1994, natural gasconsumption in the United Kingdom has risen 31 percent, while coal consumption has fallen by 44 percent {see Endnote 214}.

Britain's move away from coal-fired power towards natural gas power is the result of the rapidly changing prospects for both industries in the United Kingdom (See "Chapter 6, Recent Trends in International Investment and Trade in Coal"). The closure of uneconomic coal mines in the United Kingdom is coinciding with the increasingly available natural gas supplies that have come onstream from fields in the North Sea.

Environmental concerns have also promoted the switch to gas as coal burning has long been a major contributant to air pollution in the United Kingdom. Ironically, Britain's natural gas industry's beginnings stem from Britain's early abundance of coal resources from which town gas was manufactured. A network of essentially privately-owned local gas operations was nationalized in 1948, when the state-owned monopoly British Gas Corporation was created as a vertically-integrated company. However, British Gas was not a major producer of natural gas until the late 1970's, when North Sea production came onstream. Subsequently, British Gas came to represent the gas industry.

Great Britain started to privatize its natural gas industry 10 years ago--shortly after passage of the Natural Gas Act of 1986, which resulted in the selloff of British Gas by the UK government. In addition to privatization, the Natural Gas Act required that British Gas' transmission pipelines provide open access for all sellers of gas. However, the privatization of British Gas did not result in immediate unbridled competition. Rates still remain controlled by a natural gas regulatory body, the British Office of Gas Supply (Ofgas). Essentially, Britain has gradually introduced free markets in natural gas in three stages. In late 1986, the first stage involved allowing large users of natural gas (over 25,000 therms a year) to seek alternative sources of supply {see Endnote 215}. These users consisted largely of Britain's industrial users of natural gas. Next, in August 1992, users of natural gas in excess of 2,500 therms (primarily commercial demand) were allowed to bypass British Gas in favor of other suppliers. Both actions greatly diminished British Gas's share in the market for industrial and commercial uses. The final stage of privatization is currently being implemented and is creating a very different natural gas industry in Britain.

The newly-enacted Gas Act of 1995 introduced competition into the residential gas market. Following passage of the Act, the UK initiated a free market experiment in natural gas distribution by allowing a half million residential and small business consumers in three southwestern counties to choose their natural gas suppliers {see Endnote 216}. Previously, the sole supplier of natural gas to thesemarkets had been British Gas. This pilot program is designed to provide a test ground for the eventual deregulation of the entire natural gas market in the UK, scheduled to take place in 1998. As of April of 1996, Ofgas had licensed 10 companies to supply natural gas in the pilot area. The nature of these companies' operations suggests how dramatically the natural gas industry in the UK is evolving.

Included in the ten companies awarded licenses are several U.S. electric utilities and petroleum companies from the United States, Norway, France, as well as from the United Kingdom (Table 6). These companies also include some of the UK's recently-privatized regional electrical companies and PowerGen, one of the two recently-privatized power generation companies.

The petroleum companies entering the UK's newly-opened natural gas distribution business have all substantial North Sea natural gas operations. The primary purpose of obtaining these licenses is to integrate their upstream North Sea operations with downstream residential natural gas demand in the UK. Amerada Hess, Amoco, Conoco (DuPont), Phillips, and Texaco of the United States, Statoil and Norsk Hydro of Norway, and TOTAL of France have all obtained licenses or conditional licenses to market natural gas in the newly-opened regions.

A number of electric utility companies (both from the UK as well as from the U.S.) have also set up subsidiaries in the newly-deregulated regions. This may eventually result in the creation of a residential energy utility industry in the UK with a variety of single service and mixed service companies {see Endnote 217}. This would be a marked difference from the structure of Britain's electric power and natural gas distribution structures in the past, when two single companies (the Central Electricity Generating Board and British Gas) were the primary providers of these services.

Several of the newly-created natural gas distribution companies are subsidiaries of the current twelve regional electric distribution utilities--and are, in some cases, foreign-owned. London Electricity, the Eastern Group, Northern Electric, Norweb, Southern Electric, and South Western Electricity have all created natural gas distribution subsidiaries. One former coal company, British Fuels Gas Ltd. (a former subsidiary of British Coal), has also obtained a natural gas distribution license, as has Calor through its joint venture with Texaco {see Endnote 218}.

An additional three companies have been granted conditional licenses: Alliance Gas (a joint venture between British Petroleum and two Norwegian companies), Kinetica (controlled by PowerGen and Conoco UK), and Southern Gas (controlled by Amoco and Seeboard).

The privatization of the UK's natural gas industry has also involved the privatization of the former gas monopoly, British Gas. Privatization of British Gas has had a major impact on the structure of Britain's natural gas industry and on the structure and operating performance of British Gas. One facet of the 1986 Natural Gas Act allowed independent producers to market gas, which resulted in a greatly reduced British Gas share of the U.K. natural gas market. Greater competition spurred British Gas to reorganize. In 1994, British Gas split itself in two separated businesses. Transco, by far the larger of British Gas' two newly-created businesses, consists of British Gas' former natural gas transport and storage business, exploration and production business, and the overseas business {see Endnote 219}. The other newly-created business, British Gas Energy, consists of the domestic supply arm for 19 million customers, the Morecambe Bay gas fields (which contain 4.5 trillion cubic meters of gas and account for most of British Gas Energy's assets, see Endnote 220), and the service and retail gas business.

British Gas has subsequently looked overseas for growth. In 1995, British Gas merged purchased shares in NGC Corporation, a major purchaser, marketer, and transporter of natural gas in North America {see Endnote 221}. British Gas is currently building pipelines in South America and planning natural gas distribution facilities in India and Thailand. British Gas is also pursuing natural gas transmission and distribution, and electrical power opportunities in Indonesia, Pakistan, the Philippines, and Vietnam.

British Gas' experience with privatization in many ways resembles the experience that a number of natural gas transportation companies have undergone as a result of deregulation in the United States. For instance, compounding British Gas's introduction to market forces has been the burden of "take-or-pay" contracts {see Endnote 222}. Prior to its privatization in 1986, British Gas entered into a number of long-term contracts with North Sea producers--agreeing to set prices for 25-30 years. However, in the meantime, an oversupply of North Sea gas, coupled with the entree of new competition, put downward pressure on domestic natural gas prices in the United Kingdom. As a consequence, British Gas is operating under the burden of having accumulated several billion dollars worth of take-or-pay liabilities.

Finland, Norway, and Sweden

In Scandinavia, substantial progress in privatizing electricity has occurred and the beginnings of an interregional electricity market are currently underway. Thus far, Finland and Sweden have agreed to the creation of a broad electricity market encompassing all of the Scandinavian countries.

After the United Kingdom, Norway has been the most aggressive of the European countries in introducing competition into electricity markets. Norway deregulated its electricity markets in 1991 and 1992. The 1990 Norwegian Energy Act, which became effective in January 1991, calls for increased competition in the production and sale of electricity. It also allows consumers to select their suppliers. Statkraft, the state power company, was divided into two independent government-owned companies; a production company (Statkraft SF) and a transmission company (Statnett SF). Since privatization, there have been some regional mergers in Scandinavian electricity. In April of 1996, Norway's Statkraft bought into Sweden's Sydkraft for $179 million {see Endnote 223}.

Sweden is moving toward competitive generation and distribution markets at local, regional, and national networks. Several foreign investors have shown an interest in acquiring Sweden's electricity assets.

In addition to the Statkraft purchase, France's Electricity de France acquired a 25-percent stake in Graninge, and Germany's Preussen Elecktra acquired a 12-percent share {see Endnote 224}. Graninge is Sweden's sixth largest power producer {see Endnote 225}. Imatran Voima (IVO), the state-owned Finish power company, acquired a 50-percent share of Gullspangs Fraft, another Swedish utility {see Endnote 226}.

In Finland, electricity legislation took effect for the first time in June 1995, removing licensing requirements for power plant construction, power sales to ultimate customers, and imports and exports of electricity. Mandated transmission access and unbundling of various functional activities were also required under the legislation. A regulatory body will be established for oversight of the transmission network. The Finnish government also announced that it is considering the privatization of the state-owned utility IVO. IVO has become active in several cross-border electricity investments. In addition to its Swedish investment, IVO has also invested in independent power projects in the United Kingdom.

France, Italy, and Portugal

Electricity privatization efforts have been meager in France relative to other European countries. Electricity generation, transmission, and distribution is dominated by Electricity de France (EdF), the state-owned electricity monopoly. Electricity de France is Europe's largest electricity company and nuclear power producer. (Nuclear power accounts for three quarters of France's electricity generation.) A French government commission recently made some recommendations which would have lessened the dominant role of EdF in electricity; however, there appears to be little chance of any far-reaching reform. Although privatization of EdF seems unlikely, EdF has become a major investor in several independent power projects overseas. EdF has recent power project investments in Hungary, Spain, the Ivory Coast, Argentina, Portugal, Italy, and Poland. In May 1996, EdF purchased a 25-percent interest in the Swedish power company, Graninge {see Endnote 227}.

Italy is preparing for the privatization of its state-owned electric utility, Ente Nazionale per l'Elergia Eletrica (ENEL). The plans call for splitting ENEL into separate companies, one for transmission and one for distribution activities.

In 1994, Portugal began to implement a process that would liberalize and eventually partially privatize the nation's electric utility industry. Portugal recently separated its state-owned utility, Electricode de Portugal, into three separate companies for the generation, transmission, and distribution of electricity. However, the intended privatization is targeted to encourage individuals and institutional investors to purchase shares of electricity companies rather than to encourage wholesale purchases by other energy companies {see Endnote 228}. Since liberalization, a consortium led by National Power of the UK, along with Endesa of Spain, EdF de France, and the U.S. construction firm Morrison-Knudsen, has purchased a power station. PowerGen and Siemens of Germany have acquired a stake in Turbogas "to design, build, own, and operate a 990 MW combined cycle gas turbine power plant" {see Endnote 229}.

Hungary, Poland, Russia, and the Czech Republic

The traditional electricity industries in Eastern Europe (Bulgaria, Czech Republic, Hungary, Poland, Romania, and Slovakia) are vertically integrated monopolies controlled by central governments, but reforms have started in some countries with respect to structure, ownership, and regulation. Countries where reform has been initiated include Hungary, Poland, Russia, and the Czech Republic. Reforms are considered necessary by some nations to ensure the availability of foreign funds needed to upgrade and expand the power industry.

Among Eastern European nations, Hungary has adopted the most ambitious privatization program for its electrical utility industry. In 1991, the state-owned electricity company was converted to a corporation (MVR). MVR became a holding company for six regional power distribution companies {see Endnote 230}. Subsequently, Hungary sold the six power distribution companies and all generation assets, except for nuclear power and the transmission grid {see Endnote 231}. Several major foreign companies bid for ownership of these companies, although Powerfin, a unit of the Belgium company Tractebel, a consortium of German firms, and Electricity de France were the winning bidders {see Endnote 232}. PowerGen was the first company to purchase an independent power producer in Hungary and Tenneco is currently negotiating an independent power producer purchase {see Endnote 233}.

Poland has disaggregated its power sector and now allows competition among independent generation companies. However, the power generation market is still subject to a variety of regulatory requirements {see Endnote 234}. Also, independent transmission and distribution companies have been created that operate separately from generating companies. Privatization of electricity generation and distribution is also being considered, although the government plans to maintain 51-percent ownership of the transmission grid. Thus far, Electricity de France has invested in a 450-megawatt coal-fired plant in Krakow, Poland {see Endnote 235}.

Russia began a decentralization program in 1993 that will allow 75 percent of its generating capacity to be under the responsibility of the regional power companies and their regulatory bodies. The Czech Republic is privatizing its national generation and transmission company, and plans have been made to privatize regional distribution companies.

Australia

Through a reform process that was initiated in 1991, the Australian government committed itself to a completely competitive power market by 1999, encompassing the development of independent interstate transmission networks and competitive power generation. The impetus for utility reform came from the Australian National Commission, which saw considerable benefits from the privatization of state-owned utilities. This Commission recommended that ending scores of monopolies would substantially increase national output and employment, while reducing electricity prices and restraining overall inflation {see Endnote 236}.

Until recently, almost all electricity companies in Australia were owned by state governments. Thus far, the state of Victoria (Australia's second most populous state) has been the most aggressive of the state governments in privatizing its state-owned energy industries. In 1995, Victoria began to privatize its electric power industry, in part in a manner modeled after the British electric industry privatization program. Prior to privatization, the Victoria state government merged 29 electricity distribution companies into five companies, while splitting the state generating company into five enterprises, each with a power station.

The year 1995 saw the first wave of privatization of Victoria's electric power industry. That year, Victoria sold off all of their electric power distribution companies {see Endnote 237}, raising $6.7 billion in the process {see Endnote 238}. All were purchased (at least in part) by U.S. companies.

Victoria's power generation facilities are due to be privatized in 1996. For some of the U.S.companies involved, these Australian purchases constituted their first overseas investments. The first sale involved Utilicorp's 49.9-percent purchase of United Energy (Utilicorp's Australian partners were Australian Mutual Provident Society and the State Authorities Superannuation Board) for $1.2 billion {see Endnote 239}. The next purchase involved General Public Utilities, purchasing fifty percent of Solaris Power for $713 million, plus an additional $110 million in franchise fees {see Endnote 240}. Subsequent transactions included Texas Utilities' purchase of Eastern Energy for $1.6 billion {see Endnote 241}, PacifiCorp's purchase of Powercor for $1.6 billion, and Entergy's purchase of CitiPower, Ltd., for $1.2 billion {see Endnote 242}.

In 1996, Victoria initiated the privatization of its power generation industry. PowerGen of the United Kingdom (itself a recently privatized electricity generation company) won its bid for the Yallourn power generation facility for $1.8 billion {see Endnote 243}. The Yallourn plant supplies roughly one-quarter of Victoria's electricity {see Endnote 244}. Mission Energy of the United States later purchased the Loy Yang power plant for $1 billion {see Endnote 245}.

There have also been some privatization efforts outside of Victoria. Northern States Power (of the United States) purchased a 37-percent equity stake for its services in rehabilitating and operating the 1,680-megawatt Gladstone Plant in Queensland {see Endnote 246}. SCE Corporation (also of the United States), through its Mission Energy Corporation subsidiary, plans to build a $111-million power plant in western Australia {see Endnote 247}. Japan's Sithe Energies is constructing Australia's largest cogeneration plant, a 175-megawatt gas-fired plant near Sydney. The Australian government sold the Moomba/Sydney natural gas transmission pipeline to Australia Gas and Light (51 percent) and Nova Corp of Canada and Petronas of Malaysia (49 percent) for $535 million.

See Electricity Reform in Australia

India

India's power sector is moving toward allowing 100-percent foreign ownership of generating plants. The Indian government is counting on independent producers to expand electricity capacity to meet desired targets by the end of the century. Annual growth in electricity demand in India is expected to average about 8 to 10 percent for the rest of the 1990s.

The central government has thus far opened up eight power plants to foreign investors. Several of these plants will be owned by U.S. investors {see Endnote 248}. During 1995, CMS Generation (a subsidiary of CMS Energy, both based in the United States) invested approximately $11 million in GVK Industries, the developer of a 235-megawatt gas/naptha-fired plant under construction in the state of Andhra Pradesh. CMS Generation has a total equity commitment to the project of approximately $20 million, representing a 25-percent ownership interest {see Endnote 249}. AES is building a $633-million, 420-megawatt coal-fired power project in Orissa {see Endnote 250}. Bechtel signed a Memorandum of Understanding for a joint venture with an Indian company to develop up to 1,000-megawatt of renewable energy capacity by the year 2000 {see Endnote 251}. Cogentrix signed an agreement for the purchase of electricity. Houston Industries is close to completing a deal to develop a 45-megawatt power plant in India. The company is already developing a $700 million 500-megawatt coal-fired plant {see Endnote 252}. Enserch signed a Memorandum of Understanding for a $450-million, combined cycle power plant in Kerala {see Endnote 253}.

Recently, a widely-publicized dispute between Enron and the Indian state government of Maharashtra underscored the potential conflicts that might arise between foreign investors and host governments. In 1995, a newly-elected nationalist Maharashtra state government decided to cancel a $2.8-billion power plant developed by the Enron Corporation after Enron and its partners (Bechtel Enterprises and the General Electric Company) had already spent $300 million. The newly-elected government alleged that the previous government had secretly negotiated the contract with Enron under terms that favored Enron and disadvantaged consumers. The cancellation had the effect of jeopardizing the credibility of India's economic reform program {see Endnote 254}. Enron later succesfully renegotiated a deal with the state government in early 1996, which called for a reduction in electricity rates and allowed the project to proceed. Enron and its solar joint venture partner, Amoco's Solarex, are also in the planning stage of a $100-million 50-megawatt solar power plant to be built in Rajasthan {see Endnote 255}.

Pakistan

Pakistan's five-year plan (1993-1998) called for $10.5 billion in electric power generation investment {see Endnote 256}. Pakistan faces enormous new electricity generation capacity needs. To meet its growing power needs, Pakistan has actively encouraged investment to build private sector power plants. Pakistan also plans to privatize its state-owned electric utilities
{see
Endnote 257}. In addition, the Pakistani government is encouraging build-operate-transfer (BOT) agreements, both for new power projects and for some of the thermal power stations managed by the country's major utility. The first major project involving foreign investment is the 1,292-megawatt Hub Power Company plant {see Endnote 258}. Hub is due to be completed in 1997. A consortium of domestic and foreign companies have provided funding for Hub Power, prominent among them are National Power (of the United Kingdom), which took a 25-percent share; Xenel (of Saudi Arabia), which took a 15-percent share; and Entergy (of the United States), which took a 10-percent share. Pakistan is benefiting from World Bank financing through a BOT scheme to develop another major electricity project, the Hab River project, which will consist of four oil-fired 323-megawatt units. A consortium of domestic and international companies has provided the financing for Hab River led by the recently-privatized electric utility Midlands Electricity PLC, of the United Kingdom {see Endnote 259}. By 1966, Pakistan had reached financial closure on at least 10 independent power projects. Foreign investors involved in these projects include AES Corp (of the U.S.), Tomen (of Japan), Japan Power Generation, and Southern Electric Power (of the United Kingdom). AES raised $560 million in financing and began construction on two 337-megawatt oil-fired power plants in Pakistan {see Endnote 260}. In addition, a joint venture oil-fired power plant between Enron and Bechtel is in the financing stage {see Endnote 261}. Other recent foreign energy investments in Pakistan include several renewable projects, such as wind power, solar, and hydro.

China, New Zealand, Indonesia, the Phillippines, and Morocco

Between 1990 and 2010, China is expected to almost triple its consumption of electricity. China recently opened its power sector to foreign investment. Several joint ventures have already been established for the construction of electric generating units. China is modifying its legal framework to allow the possibility of full foreign ownership of power plants. In at least one project a build-ownership-transfer financing arrangement is being tested. Coastal constructed a 40-megawatt power plant in Wuxi City and began construction on a 76-megawatt power plant in Suzhou, and plans a 72-megawatt plant in Nanjing {see Endnote 262}. Enserch reached an agreement to cooperatively develop and operate a 36-megawatt coal-fired plant near Zhejiang {see Endnote 263}.

New Zealand started to privatize its electric power industry in 1987, in the midst of an ambitious attempt to transform the economy to a greater free-market economy. A transmission corporation was created in 1993, and monopolies in local distribution and retailing were eliminated. In 1995, the New Zealand government issued a new electricity policy designed to create a competitive power market. The policy puts a limit on how much new capacity the state-owned Electricity Corporation of New Zealand (ECNZ) can build in the future, requiring at least 1.5 gigawatts of new capacity to be built by the sector over the next few years. In January 1996, ECNZ was split into two companies, with ECNZ retaining most of its power generation. Over the past few years, a number of New Zealand's electric utilities have been purchased by U.S. utilities. IES Industries took a minority interest in Powerco Limited and Central Power Limited {see Endnote 264}. Further, Utilicorp purchased 20 percent of the common stock in Power New Zealand {see Endnote 265}, New Zealand's second largest electric distribution company.

Until recently, the Indonesian state electric utility, PLN, was responsible for most electric power generation, transmission, and distribution. In 1990, the Indonesian government announced that it would actively encourage private investment in power generation, including that from foreign investors. Later, the government established three operating subsidiaries. These operating subsidiaries are slated to go public in 1997 and their shares will be traded on the New York Stock Exchange {see Endnote 266}. These companies will be free to compete and create strategic alliances with foreign companies in the growing number of independent power projects that are currently underway.

Independent power projects in Indonesia are generally financed through BOT arrangements {see Endnote 267}. Indonesia's rich variety of energy resources provides an array sof economical fuels to power electricity generation. The largest projects currently planned (Paiton 1 and Paiton 2) will consist of coal-fired power plants and involve investment from General Electric and Mission Energy (both of the United States), Mitsui (of Japan), Siemens (of Germany), and PowerGen (of the United Kingdom). Duke and Fluor Daniel (both of the United States) have been contracted to build Paiton 1.

In the Phillippines, the power sector is characterized by continuous outages due to insufficient electricity supply. Like Indonesia, the Phillippines plan to rely heavily on private investment through BOT agreements. By the end of 1993, a total of 27 contracts had been awarded for the construction of power plants. The Philippines are planning to restructure and to privatize the National Power Corporation, the country's main state-owned utility.

One of the largest foreign investors in Philippine electricity is the Hong Kong-based company Hopewell. Hopewell is providing full financing for three oil and coal-fired projects totaling 1,700 megawatts and partial (49 percent) funding for a 734-megawatt coal-fired plant. In March 1996, it was reported that Enron is bidding on an $800-million, 1200-megawatt gas-fueled power plant that is to be operating in 1999 {see Endnote 268}. California Energy (of the United States) has undertaken three geothermal projects expected to provide an additional 500 megawatts of power {see Endnote 269}.

Other major foreign-investor led power projects in the Philippines include a 93-megawatt coal and oil-fired unit in Mindano, led by CMS Energy (of the United States), and a 60-megawatt oil-fired unit financed equally by Tomen (of Japan), General Electric Capital (of the United States), and Wartsila Diesel (of Finland).

Morocco's reform of its electricity sector maintains the current state-owned electricity distribution monopoly (Office National de l'Electricite). However, private companies are now allowed to generate power for sale {see Endnote 270}. In April, 1996 CMS Generation's (of the United States) independent power unit finalized an agreement with the Office National de l'Electricite. CMS and its 50-50 partner Asea Brown Boveri Energy Ventures (the Swedish-Swiss conglomerate) will each hold concession rights and an agreement to sell electricity to the Office National de l'Electricity for 30 years {see Endnote 271}. The total cost of the initial acquisition and the additional 660 megawatts will be $1.3 billion. Two other private-power projects in Morocco are pending {see Endnote 272}.

Argentina

In terms of the number of companies with active investments, Argentina holds the greatest interest among all Latin American countries for foreign firms. A total of 28 companies have active projects underway in Argentina (Table 8).

Argentina already has sold more than 9,000-megawatts of generating capacity and could sell as much as 7,500 additional megawatts. A 2,700-megawatt hydroelectric plant is currently being offered to buyers {see Endnote 273}. Much additional generating capacity, transmission systems, and other portions of the electricity industry are expected to be offered for sale soon
{see Endnote 274}.

Electricity companies and oil and gas companies (chiefly from Chile and the United States) constitute almost all foreign investment in Argentine power generation. The Chilean companies, all of which are primarily electricity companies, are Chilgener, Chilquinta, Enersis S.A., and National Electric of Chile. The U.S. oil and gas companies are Amoco and Enron. The U.S. electricity companies are Cinergy, CMS Energy, Dominion Resources, Duke PowerEntergy Corp, Houston Industries, LG&E, Northeast Utilities, PSI Resources, and Southwestern Public Service.

See Electricity Reform in Argentina

Bolivia

Bolivia's new Electricity Law requires the separation of electricity generation, transmission, and distribution. Any companies engaged in one of these activities is required by the law to divest itself of the other activities. Thus, Bolivia, which already privatized its state electric utility, Ende, is potentially restructuring all private firms engaged in their electricity industry.

The sale of its state electrical utility, Ende, made Bolivia one of the first South American countries to allow private investors to enter its domestic electricity market. Ende was broken into three regional generating companies, each of which was purchased by a different foreign company. The purchasers were almost without exception U.S. companies (Table 8). The U.S. companies Dominion Resources and Energy Initiatives (an affiliate of General Public Utilities) each bought one of the three regional companies. The third regional company was purchased by a consortium headed by the Canadian company Bolivian Generating Group, but included Baltimore Gas and Electric and Pennsylvania Power and Light {see Endnote 275}. The regional companies averaged 174 megawatts of generating capacity and split 50 percent of ownership amongst themselves (with Bolivia retaining the other 50-percent ownership share) in exchange for an average of $47 billion and the assumption of $38 billion of debt. The purchasers will operate their plants for 5 years and also have exclusive rights to build any new generating facilities for domestic or export markets.

In addition to the privatization of Ende a few other projects are underway. Most of these projects involve U.S. electricity companies, including Catalyst Energy Corp, Cogenerex, Entergy, and General Public Utilities. Additionally, the Spanish electricity company Iberdrola has made a power distribution investment.

Chile

Currently, there is little investment by foreign companies in Chile's electricity industry. Despite the similarity between Chile's electricity deregulation and the deregulation/privatization in Argentina, Bolivia, and Peru, notably less investment has been made in Chile. Perhaps part of the reason is that Chile's privatization preceded these countries' privatizations by several years. Chilean electricity companies, however, are making numerous investments in other Latin American countries' electricity industries.

Some foreign investment is occurring in Chile. Southern Company, through its international affiliate, Southern Electric International, increased its ownership in the northern Chilean generation and transmission utility, Edelnor. Further, Chile's state copper company is offering 25 percent of one of its power plants for sale. Other companies with investment projects in Chile include the U.S. electric companies Duke Power, which invested in gas-fired power generation, and Entergy, which invested in power generation (Table 8). Although little foreign investment in Chilean electricity currently exists, a substantial increase in its generating in capacity may occur in the next few years. By October 1995, four U.S. companies had announced plans to build four gas-fueled plants in Chile {see Endnote 276}.

Colombia and Peru

In Colombia, an effort to sell the state utility has begun. Colombia's congress has approved a privatization plan, which affects at least 25 companies in many industries, including the hydro and thermoelectric industry {see Endnote 277}. Foreign companies actively investing in Colombia include ABB Energy Ventures (Sweden/Switzerland), Citizens Power and Light (United States), General Public Utilities (United States), K&M Engineering and Consulting (United States), and Northern States Power (United States). All investment is in power generation, most of which is gas-fired (Table 8). One notable exception is the coal-fired generation investment of Citizens Power and Light.

Peru restructured its electricity industry into separate generation, distribution, and transmission companies, as have Argentina, Bolivia, and Chile {see Endnote 278}. However, unlike Bolivia and Chile, Peru hasseen much foreign investment in power distribution, in addition to power generation. Most of the power generation investment has been in hydroelectric generation. The companies active in Peru include the Chilean companies Chilectra, Chilquinta, Enersis S.A., and Endesa; the U.S. company Entergy; and the Canadian company Ontario Hydro (Table 8).

Brazil, Mexico, and Venezuela

Brazil, Mexico, and Venezuela are similar in that their privatization efforts have been fairly limited. A total of five foreign companies have invested in the electricity industries of Brazil, Mexico, and Venezuela (Table 9).

Brazil enacted a 1993 law that allows large electricity consumers to build and operate their own generating facilities and sell any excess power to a public utility {see Endnote 279}. A second electricity law is under consideration, which would separate power generation, transmission, and distribution as has been done already in Argentina, Bolivia, Chile, and Peru.

Thus far, no foreign investment has actually been made in Brazilian electricity. The single major electricity sale consumated involved the purchase of a stalled hydroelectric plant by a Brazilian consortium. However, another attempt by Brazil to entice foreign investment may be made soon with the offer of four regional subsidiaries of Electrobras, the Brazilan state utility. Also, AES Corp, a U.S. electricity generator, has opened an office in Brazil, which is one tangible sign of possible future foreign investment.

Mexico's attempt at electricity sector reform has consisted of recently passed legislation allowing private companies to import power supplied as a private service to the private sector. However, any surplus power must be sold to the Mexican state utility company, CFE {see Endnote 280}. Central and South West Company, New World Power, and PP&L Resources (all U.S. companies) have power generation projects underway in Mexico, all of which will sell wholesale power after completion.

Venezuela recently made its third unsuccessful attempt to sell state electric utility assets. Five state-owned generation and distribution companies with a total generating capacity of nearly 5 gigawatts have now unsuccessfully been offered for sale {see Endnote 281}. Venezuela plans substantial expansion of its power generation capacity, which should provide ample opportunities for foreign investment {see Endnote 282}. However, only two companies, both based in the United States (Community Energy Alternatives and Public Service Enterprise Group), have currently invested in Venezuelan power generation.

The Dominican Republic and Trinidad

Due to recent reforms, both the Dominican Republic and Trinidad have privatized their electricity industries.

Although both of these countries are relatively small, they have experienced more foreign investment than many of Latin America's larger economies (Table 10).

The Dominican Republic has attracted Coastal and Enron, both U.S. oil and gas companies; Destec Energy, Energy Initiative, and General Public Utilities, all of which are U.S. electricity companies; and Honduras Electric Company. Oil-fired power generation investment was made in all cases.

Trinidad also recently privatized its energy industry. U.S. companies have provided all of the foreign investment in Trinidad's electricity industry. Amoco's investment in oil and gas production in Trinidad appears to have motivated its subsequent investment in Trinidad's electric company {see Endnote 283}. Southern Company (both directly and through its international affiliate Southern Electric International) has made numerous investments in power generation in Trinidad.

Continue to Chapter 6

This report is online: http://www.fedstads.gov


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