Intervention in an electric company opens debate on public utilities in Argentina

The measure taken by the government against Edesur, one of the big distributors in Buenos Aires, puts on the table the debate about the role of private companies in the provision of essential services.

From the low level of investments to the criticism of the State for inefficient control: the word of the specialists.

The state intervention in Edesur, one of the largest electricity distribution companies in the country, comes at a time when society is fed up with the massive power cuts that have hit the Buenos Aires Metropolitan Area (AMBA).

According to experts, the measure does not close the possibility of taking away the company’s concession if the problems persist.

Amid the most extensive heat wave in Argentina’s history, more than 150,000 users were affected by power connection problems.

After an extensive history of power cuts, the Government of Alberto Fernández ordered that the state action over the company will be extended for 180 days.

The interventor is the current mayor of the Buenos Aires municipality of Avellaneda, Jorge Ferraresi, one of the districts most affected by the cuts.

“The intervention is an important step forward, which proves the awareness of the seriousness of the announcement.”

“But it is insufficient to reach a solution to the issue, which would require an in-depth definition of both the concession to Edesur and other companies”, warns Marcos Rebasa.

He is an energy and natural resources specialist and a Scalabrini Ortiz Energy Institute member.

Edesur has 2.6 million customers and provides electricity to millions in the south of the AMBA, in an area that includes 12 communes of the Argentine capital and 12 districts of the Province of Buenos Aires.

Created in 1992 after the privatization of the state-owned company Servicios Eléctricos del Gran Buenos Aires, amid the neoliberal reforms of the government of Carlos Saúl Menem (1989-1999), Edesur was awarded the service concession for 95 years, an unprecedented event for providers of this type.

The company changed its administrator three times, but it was never under the control of national capitals.

After passing through Chilean and Spanish hands in 2009, the Italian Enel acquired the company, buying 75% of its shares.

However, in 2022 Enel announced its plan to withdraw from the country and sell the company as part of its regional divestment project.

Throughout its 31 years, the company has been the target of countless criticisms due to repeated service cuts during the sweltering Porteño summer, which is used to temperatures of up to 40°C.

TAKE THE BULL BY THE HORNS

“The intervention cannot define the company’s decisions, which is why it is insufficient,” says Rebasa.

The alternative proposed by the researcher is to remove the private company from the service administration.

“I believe that the concession should be taken away from the company because today, the causes contemplated in the contract are verified. It has reached the point where the capacity of fines allows the interruption of the concession.”

“In any case, even if it did not meet the requirements, it would still be possible to move forward: the State’s responsibility to provide a good service still exists”, says the analyst.

For the former Undersecretary of Electric Energy of the Nation, Paulo Farina, also a former president of CAMMESA, the company that manages the Wholesale Electricity Market, “the Government decided to intervene to know the problem from the inside”.

“It is not a judicial intervention, nor is it an overseer, but rather it is an inspector of investments: it is a hybrid to audit and validate the company’s investments”, he remarked.

THE STRAW THAT BROKE THE CAMEL’S BACK

Although the failures in the distribution system have been recurrent during the torrid southern summers, specialists consider that the 2023 summer finally broke the users’ patience, and the State decided to intervene.

“Something got out of hand during this heat wave: it is unacceptable to have outages lasting three days. There must be an audit so that the company clarifies what happened,” considers Farina.

The stress suffered by the electricity system reflects the insufficient investments made by the company.

According to the researcher, “the distribution network is unprepared for a heat wave when the demand ceiling reaches its limit. Today there is no grid quality, transmission capacity, or storage capacity.”

“The entire electrical system of the country is at the limit of transport and storage, and this is replicated in the provinces of the interior”, denounces Farina.

In line with the shortcomings identified by the analyst, on March 16, the national government filed a criminal complaint against the company for fraud, embezzlement, and abandonment of persons after requesting that the company directors be prohibited from leaving the country before they sold the company.

In addition to the legal actions, fines totaling $2.7 billion (US$13 million) will be deducted from users’ bills.

The penalties provided, according to specialists, do not compensate for the damage generated to users.

For the consultant, “Edesur’s performance has been bad.

The 90-year contract assumed that the company had enough financial backing to provide the service during that period for all the future demand, but this is not seen in the investments developed”.

“While Edesur’s network configuration is relatively precarious, what is surprising is the extent of the cut-off zones. This will have to be explained: it is obvious that the company should have made more investments”, highlights Farina.

SHARED BLAME

Despite the legitimate reproaches to the concessionary company, the fundamental criticisms do not fail to point to the role played by the State in the supervision of the company to guarantee the service.

For Rebasa, this is the central point.

“The State has an important share of responsibility.”

“The company does what is expected in a market system: it minimizes costs to maximize profit, which should be reinvested to improve service provision.”

“But it is the public entity that is accountable to society.”

“There is a shared responsibility in a service regime where no one fulfills their duty: negligence is not exclusive to the company.”

“Whether the State or the user pays for it, investments have to be carried out,” the researcher points out.

Based on his experience acquired in public service, Farina identifies that the structural flaw of the system lies in the formality of the concession.

“The contract has a system of rewards and punishments absolutely favorable to the company, even if it does not provide the service properly.”

“The fines per category of infractions do not give incentives to invest because they are very low: the economic equation indicates that the most convenient thing to do is not to invest”.

“The perversion of the contract prevents Edesur from offering a public service of the caliber of the one demanded in Buenos Aires. It is impossible to comply with what has been agreed,” says Farina.

EXPROPRIATION, IN THE BACKGROUND

Expropriating the concessionaire company and having the State take over the provision of the service is one of the options being considered by the Casa Rosada, the seat of the Argentine executive.

For Farina, the background of the determination is ideological.

“The discussion on expropriation is merely political because the debate is not about whether to take away the concession to resell it, but whether it is public or private.”

“There are very good distributors in both cases”.

“To say that Edesur is going to be public, and then Congress will pass a law to privatize it, does not make much sense.”

“Political order is necessary to define in the medium and long term”, considers the consultant.

The potential damages that could result from expropriation are concrete and are due to the penalties imposed by the International Center for Settlement of Investment Disputes (ICSID), the World Bank body dedicated to resolving disputes between private parties and the State.

Farina said, “a hasty expropriation does not make much sense because ICSID penalties must be considered”.

Despite the risks involved in moving in that direction, according to Rebasa, public commitment implies guaranteeing the efficient provision of energy.

“The State has an obligation to provide the public service in the best possible way, so it cannot stop to deal with potential ICSID fines for expropriating”.

The specialist’s proposal’s central axis lies in the sanctions’ certainty.

“Whether the requirements are met, the businessman will still go to ICSID and has a 95% chance of winning.”

“Therefore, the ‘ICSID risk’ is not an objective decision factor. Whatever you do, you will lose”.

With information from Sputnik