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Showdown in Latin America

Fortnightly Magazine - April 1 1998

do not contemplate rising marginal costs nor contract prices [from] 1999 to 2005," Hurd predicts.

But the pricing drop is expected. It's built into projections, notes Karl Wittbold, CMS vice president for gas transmission business development, in Dearborn. "Our new, low-cost gas technology is replacing older, less efficient oil and coal-based capacity¼ When we first started looking at the SING, prices were 30 percent higher¼ as the price of energy in the region is coming down, the mines are considering projects that add value to their product, which might not have been cost-effective in past. They may now smelt and refine copper concentrate in Chile instead of shipping it to Japan."

Although power purchase agreements permit third-party, dollar-based project financing, some agreements actually may be worth little.

"If a mine asks for 150 megawatts and then postpones its development plans for one year, that changes the picture completely," says Jourdain. Still, "while copper is very cyclical, Chile is the¼ lowest cost¼ producer in the world. So a lot of other producers will be shutting down before they do here."

The Chilean economy has been hurt so badly by the crash in Asia, which traditionally takes a third of Chile's exports, that the government has cut by 12 percent the budget at copper giant Corporacion Nacional del Cobre de Chile, or Codelco, a federally owned plant. Luckily, the government has an estimated $1.9-billion copper price hedge fund, which will soften the blow of falling commodity prices for exporters over the short- to mid-term, if needed.

Since electricity infrastructure investments are made with long-term amortization calculations, the short-term view is less critical to these projects than in other businesses, some analysts say.

"Even if all three projects are completed and there is an oversupply for five years, these [developing] companies are looking at 20-year to 30-year facility lifetimes, and the overcapacity [eventually] will be deleted," says Boente.

This doesn't mean every planned electricity development project merits investment, though. "There is no justification for many of the prices paid [for acquisitions or investments] in electricity (em it's just irrational," Santos says. "There is no way you can put pencil on paper and show the numbers."

Sprinting for the Lead

Despite its nominal, low-capital-cost position, in mid-January, Chilgener was said to be reconsidering building its electric transmission line from Argentina to Chile. Instead, it planned for power sales to the local grid from its Argentine generation investment. The determining factor would be a drop in SING electricity prices to anything under $25 per MW, Boente says.

Other analysts see the option as an advantage for Chilgener. "There are embedded alternatives in InterAndino, because of the generating capacity being tied into the Argentine grid," says another analyst. "Just because there is a dedicated transmission line to Chile, it doesn't mean the power has to go there."

A few months before, Chilgener and its bankers had trumpeted the expected financial closing for its project, including the transmission line.

"What we have done is underwritten an obligation to Chilgener on InterAndes and are proceeding with documenting a financing structure,"