Elsevier

Energy Policy

Volume 38, Issue 11, November 2010, Pages 7001-7013
Energy Policy

Privatization of electricity distribution in the Northeast of Brazil: The good, the bad, the ugly or the naïve?

https://doi.org/10.1016/j.enpol.2010.07.015Get rights and content

Abstract

This paper analyzes the evolution of five electricity distribution companies in the Northeast of Brazil using technical and financial indicators. Three privatized and two public firms were analyzed between 1997 and 2008. The financial indicators are used as proxies for the capacity of the business to generate value for shareholders, while the technical indicators are used as proxies for service quality provided to consumers. We observed that the privatized firms had their financial indicators improved after privatization, increasing the value of the firm for the shareholders. However, there is no evidence that privatization affected the quality of service provided to consumers.

Introduction

This paper explores recent electricity distribution privatization processes in the Northeast region of Brazil, a large emerging economy, but one that suffers from regional economic disparities. Until recently, there were major differences in the cost of electricity among regions, and privatization has been hailed as a panacea for reducing these regional disparities and improving efficiencies. However, few studies have explored the impact of this process in Brazil, and specifically the impact on shareholder returns and consumer service. Thus, this paper aims to address this gap and analyze whether the privatization policies, which began 20 years ago, has influenced the financial and technical performance of privatized electricity distribution companies (EDCs) when compared to those still under public control.

Using financial and technical indicators3 associated with consumer service quality, we investigate whether privatization led to shareholder and consumer benefits (“good” privatization), whether neither benefited (“bad” privatization), whether only consumers benefited, but not investors (“naïve” privatization) or if it only led to shareholder benefits, i.e. an improvement over the previous operations, but only for investors and not consumers (“ugly” privatization). The four indicators are commonly used in electricity distribution studies (e.g. Warren et al., 2003, Billinton et al., 2004, Chowdhury and Koval, 2004, Williams and Robinson, 2006, King and Segal, 2008) and specifically in Brazilian studies by Zilber et al. (2005), Reis et al. (2006), Fumagalli et al. (2007), Rocha et al. (2007) and Silvestre et al. (2010). The two financial indicators are EBITDA (Earnings Before Interests, Taxes, Depreciation and Amortization) and Annual Net Income of the firms, while the technical indicators are SAIDI (System Average Interruption Duration Index) and SAIFI (System Average Interruption Frequency Index). Based on these indicators, two main propositions on the outcome of electricity distribution privatization in the Northeast of Brazil are developed:

Proposition 1

The privatized EDCs’ financial indicators (EBITDA and Annual Net Income) improved when compared to the public EDCs, providing evidence that privatization increased value for shareholders.

Proposition 2

The privatized EDCs’ technical indicators (SAIDI and SAIFI) improved when compared to public EDCs, providing evidence that privatization increased value for consumers through service quality.

To explore these propositions, we analyzed five of the nine EDCs in the Northeast region of Brazil. This includes the two remaining public EDCs connected to the grid (Companhia Energética de Alagoas—CEAL and Companhia Energética do Piauí—CEPISA) and three that were privatized in 2000 (Companhia Energética de Pernambuco—CELPE, Companhia Energética do Maranhão—CEMAR and Sociedade Anônima de Eletrificação da Paraíba—SAELPA).

This paper contributes towards understanding and deepening the debate among policy-makers, scholars, investors and consumers about the pros and cons of the economics of privatization (Clarke and Pitelis, 1993, Sclar, 2000, Megginson, 2005). To the best of our knowledge, it is the first time a comparison with multiple indicators, both financial and technical, has been conducted in the electricity distribution sector in Brazil. It also provides regulatory bodies and policy-makers with empirical evidence and a broad view about the impacts of privatization based on financial and technical dimensions.

In the next section, we provide an overview of the Brazilian electricity distribution sector, and specifically the evolution of privatization policies in the poorer Northeastern region of Brazil. We then discuss the methodology and cases selected for this study, the empirical results, managerial and policy implications, and conclude with suggestions for research on privatization in the electricity sector.

Section snippets

An overview of the Brazilian distribution sector

Historically, the electricity distribution sector in Brazil operated under a monopoly structure but was later regulated with the aim of protecting consumers from monopolist exploitation. At that time, the tariff was fixed and an adequate return on investments was considered in the regulatory framework (Reis et al., 2006).

Apart from its strategic importance for economic growth, the Brazilian electricity sector has only become a priority together with industrialization efforts carried out under

Methodology

We applied an indicator analysis to determine the impact of deregulation on consumers and shareholders. Indicator analysis is a commonly used technique within management and more specifically for business evaluation. For Geisler (2000), an indicator is a measurement reserved for a specific description of a particular event or phenomenon. The OECD (Organization for Economic Co-operation and Development) specifies that indicators are a series of data defined to answer questions about a particular

The electricity distribution companies (EDCs) analyzed

All five EDCs studied are located in the Northeast region of Brazil and combined are responsible for more than 6.7 million consumers, providing energy for a total population of 24.6 million (comparable to the combined population of for example Sweden, Norway, Finland and Denmark). The geographical area covered by those five EDCs is approximately 766,658 km2, larger than for example France or Spain. However, this region of Brazil is one of the poorest in the country in terms of per capita Gross

Empirical results

Table 1, Table 2 and Graph 1 list the EBITDA for the five EDCs. As shown, there is varying patterns among the firms during this period. CELPE had the best accumulated EBITDA ($1.627 million5), moving from $51.1 million in 1997 to around $296.0 million by 2008. The other privatized firms, CEMAR and SAELPA, also had a growth trend, jumping, respectively, from $33.1 million and $11.8 million in 1997 to $177.8 million and $74.4 million by

Discussion

Based on the empirical results of this analysis, we found that the two public EDCs had weaker financial performance compared to the three privatized firms. CEAL and CEPISA had the worst average EBITDA before and after 2000 (Table 2). While CEAL had a relatively stagnant decrease of 3% in their average EBITDA, CEPISA had very poor performance at −85%, and particularly poor if compared with the privatized EDCs. These two public firms also had the two worst variations in the average Annual Net

Conclusion

This paper analyzed two financial and two technical indicators as an approach to verify the performance of EDCs in the Northeast of Brazil, during the periods immediately before and after privatization. We compared indicator trends between three EDCs privatized in 2000 and two that remained under public control. This study was limited by the use of a small but representative number of firms in one region in one country, and by exploring a limited number of years before and after privatization.

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