On a visit to Madrid where he participated in the Fifteenth Ibero-American Summit last week, Chilean president Ricardo Lagos made time on his agenda to meet with Manuel Pizarro, managing director of Endesa, the top company in Spain’s electricity market. On October 4, Lagos greeted Salvador Gabarró, president of Gas Natural, the leading gas distributor in Spain. The topic of discussion on both occasions was the same — Gas Natural’s offer in early September to take total control of Endesa.


The importance of Chile stems from the fact that the headquarters of Enersis is in that country. Enersis is the holding company that Endesa uses to control its operations in Chile, Argentina, Brazil, Colombia and Peru. That is not the entire story. The conversations also touched on the concentration in several Chilean sectors that Gas Natural would gain; these sectors include energy, waste management, fuel distribution and telecommunications.


The key point is that one of the main shareholders of the gas company is La Caixa, the savings institution. La Caixa owns 35% of Gas Natural, which in turn, owns 23.1% of Aguas de Barcelona, the company that run Aguas Andinas, the largest waste management company in Chile. La Caixa, a Catalonian firm, also owns 12.5% of Repsol YPF, the oil company that owns the third-largest network of gas stations in the country. Repsol YPF is also one of the country’s main suppliers of gasoline and natural gas (it owns a 30.8% share of Gas Natural). In addition, Repsol YPF owns 5% of Telefónica, which owns the largest fixed-line telecommunications network in Chile.


While alluding to this spider web of interconnections, Gabarró promised the Chilean president that when it came to purchasing electricity, which is now controlled by Caja Madrid, the merger would not produce a concentration of already wide-ranging businesses in Chile. “There is no reason to talk about problems regarding competition or concentration in regulated markets in Chile,” Gabarró told Lagos. His words were announced in a press release issued by La Caixa and Repsol YPF. Antonio Brufau, president of Repsol YPF, also attended the meeting. In his talks with Brufau, Lagos raised the question of Chilean energy ownership, perhaps taking advantage of the opportunity to blame Brufau for major cuts in natural gas shipments from Argentina that set off a severe energy crisis two years ago. Hours after the meeting, Lagos announced that the meeting was merely “an exchange of viewpoints.”


Gabarró also told Lagos that in the future, assets and investments held by Endesa in Chile will be guaranteed. He promised that Chile will be the focal point for new business for the firm in Latin America, which has some 10.9 million consumers of electricity, and 4.6 million users of gas.


When it was Endesa’s turn to speak, Pizarro told the Chilean media that President Lagos had not participated in this process. Pizarro could not resist the opportunity to criticize the way the process had worked out in Spain. “We have to let institutions function freely,” Pizarro said in a statement broadcast by a Chilean radio network. “As I’ve already said, I don’t like the fact that authorities need to make pronouncements about topics they have already commented about. This has never happened in Chile, for example. That is the good fortune that you people have enjoyed, in a place where the state of law functions.”


The head of Endesa told President Lago about his “total commitment to Chile” and guaranteed his company’s investment plans in the country. These plans include the ambitious hydroelectric plan in the Aysén region in the south, which is projected to involve investments of $2.4 billion. “Our commitment to Chile is total. The President knows that, and it has been a conversation among Chileans,” Pizarro concluded.


The Legal Obstacle


After their last date in the Spanish capital, Lagossaid that he was aware of “the possible implications of the fact that several public utility services will be under the control of the same company.” He also warned that the most important thing from Chile’s viewpoint is to “guarantee the promised investment levels, and guarantee that there is another manager who could have different opinions.” He stressed “that there is an equally important need for maintaining a level of investment in various alternative energy areas.”


If the merger takes place, how will regulatory agencies, political authorities and consumers react? Ronald Fischer, a professor at the University of Chile’s Center of Applied Economics (CEA), said that the agencies that oversee the protection of competition — the FNE, Chile’s national agency for prosecuting economic crimes, and the TDLC, the country’s court for the defense of free competition — could determine that in Chile “they have to sell one or another part of the holding company that results.” It is equally possible, he adds, that legislators could react with action “because in the past, they have expressed their fears when it was time to privatize companies that supply water. They introduced a series of restrictions that were made mandatory before taking ownership.”


Chilean law for providing concessions to waste management prevents the same company from simultaneously distributing electricity and providing local telephone service in any one geographic region within a concession. “If the result of the merger is obviously illegal, then the question is ‘What do we do about it?’” says Fischer. This would lead, first, to action on the part of headquarters which would have to sell off one of the operations that violated the law. In this sense, it would not be a problem for the regulatory institutions of the market. “Simultaneously owning control of Enersis and Aguas Andinas would clearly be a source of concern. From the legal point of view, that doesn’t seem feasible,” Fischer insists.


Nevertheless, some people question the effectiveness of this rule, and even the reason for its existence. Maria de la Luz Domper, researcher at the Chile-based public opinion institute known as ILD (Institute of Freedom and Development), suggests that regulatory rules should not establish this sort of prohibition because they can definitely affect the selling price of some public service companies. “They would be ruling out some possible parties who might be interested.” Domper says that what they are trying to achieve is to protect free competition; that’s the raison d’etre for the institutions represented by the ILD. “There is no reason to amass legal restrictions in every public sector. There is no justification for that if there is already an institution such as a court, which is sufficient in itself.” Domper emphasizes that in a situation involving concentration of property, the government should not create legal restrictions, only penalize them ex post [facto], “if this problem triggers competition problems.”


Natural Gas: A Strategic Asset


The natural gas market in Argentina and Chile is one of the most sensitive markets to the outcome of the Spanish deal. Eduardo Saavedra, director of the economics department at the Alberto Hurtado University (UAH) in Chile, is worried about the fact that Repsol YPF will gain access to the property of Endesa. The Spanish oil company owns more than 50% of Argentina’s natural gas exports to Chile. “Suppose that Repsol YPF has control of natural gas, both through its mining in Argentina and through the most important gas pipeline for generating thermoelectric power in Chile — Gas Andes, headed by France’s TotalFinaElf, and also comprising AES Corp. and companies from Argentina and Chile. In such a case, there is a huge problem with geopolitical implications. A single enterprise could own all the inputs for Chile’s entire electricity sector.”


Endesa Chile owns practically all water rights in the country, with the sole exception of the Colbún reservoir, and some very small operators. “Endesa has 70% of Chile’s reservoirs and 100% of the remaining water rights that can be used to generate hydroelectric power,” says Saavedra. “So Endesa has control of hydroelectricity, and the resulting question is, ‘Who will have control of thermoelectricity?’” Saavedra emphasizes that Endesa Chile has significant market power in the ‘under-margins’ of the electric sector. In other words, when there is a lot of water, Endesa’s cost of production becomes lower than those of any other producer. The other generators of electricity in Chile — AES Gener (U.S.) and Colbún (which belongs to the locally owned Matte group) — compete by buying gas from an independent called Repsol YPF, or by using the gas pipeline owned by AE. The key is what happens if Repsol YPF winds up controlling all the inputs in Chile’s electricity sector.” Another relevant point has to do with the ways things are today, including the fact that natural gas is cheaper than any other substitute, including coal.


Given the dominant role of Repsol YPF in Argentina’s natural gas sector, and the fact that it could extend itself into the Camisea project in Peru, you have to wonder if making Repsol YPF a part of Endesa would help to improve the viability of Spain’s plan for creating an “Energy Ring.” Governments of the region have already launched this plan for guaranteeing the supply of gas in South America. Saavadera notes that a project of this importance requires financial backing that is “very large-scale” along with “integrated planning for giving legal certainty to the investments that it must undertake. I believe that the energy business is one of the major players; the small ones have already died.” As a result, Saavedra agrees that the destiny of South America’s energy sector is in the hands of Repsol YPF on the one hand, and Brazil’s Petrobras, on the other.

Fear of Consumers: Great Power of Negotiation


Concentration of ownership in the Latin American electricity sector has proceeded gradually. Between five and six conglomerates exist now. Claudio Lara, economics coordinator for the Latin American office of Consumers International, accuses these companies of “operating under strategies that are global or at least regional, and which therefore significantly go beyond the realm of national regulation.” For example, Lara notes that the first serious manifestation of this reality was the decision made by public service companies in Argentina, “particularly Spanish companies” in June 2003. The companies denounced the Argentine government before the World Bank’s independent court of arbitration, condemning the losses they suffered after their rates were frozen at the beginning of 2002. “If we have local entities that already have little impact on the companies that operate across borders, we can see that consumers are increasingly unprotected from the impact of the changes that are occurring,” says Lara.


Saavedra adds that a deal like the merger of Gas Natural and Endesa has just as much impact on economic policy. Instead of talking about countries that become dependent on one conglomerate in such sensitive sectors as energy and drinkable water supply, Saavedra prefers to talk about their “increased negotiating power.” “Let’s imagine a political decision aimed at regulating natural gas; for example, suppose they became convinced that the deregulated market wasn’t really working. The pressure (of the company that had a presence in that market) would be greater if it also had control over hydroelectricity.” So, if the only remaining counterparts are Colbún and AES Gener, strictly speaking, Endesa will be thinking like the entire conglomerate.


Things will work out that way if greater weight is given to defending Latin American consumers. In the case of Chile, explains Lara, the consumer protection law does not cover the entire realm of public services, the way it does in Argentina. However, Lara applauds the recent introduction of “class action” cases, which enable groups of consumers to pursue damages that result from an unforeseen cut in the supply of electricity.


Because of growing worries, Nicolas Eyzaguirre, Chile’s finance minister, attempted to calm the waters by addressing the topic of concentration and its possible impact on consumers. Eyzaguirre said that he is considering anti-monopoly legislation for his country. “The institution that deals with this subject (the FNE) has been modernized a great deal, so people can be quite calm about that.” Along the same lines, there are concerns about possible opposition to the takeover by minority shareholders of Enersis and Endesa Chile and other interested parties such as institutional investors, including pension funds. When it comes to taking control, Eyzaguirre said, “This has been spelled out in extraordinary detail in the law that covers takeovers. To the degree that these legal provisions are fulfilled, we have no problems. However, this has to be done according to the law.”