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24 | THOMAS ANDREW O’KEEFE THE CRISIS IN THE ARGENTINE ENERGY SECTOR AND ITS REGIONAL IMPACT | 25 scheme that required generator owners to deposit 65 percent of their bonds in a trust fund called the Fondo de Inversión en el Mercado Eléctrico Mayorista (FONIVEMEM). The bonds are supposed to be redeemed for cash to build two new thermal plants in Buenos Aires and Rosario. In return for this forced invest- ment, the generator owners will receive shares in the new plants. Because it was unclear at the time where the natural gas to supply the new plants was supposed to come from, many generator owners initially balked at handing over their bonds. In response, the Secretariat of Energy in February 2005 announced that it would forcibly require these recalcitrant firms to direct 100 percent of their bonds to FONIVEMEM or risk never being able to redeem them. The strong-arm tactics used to get private-sector generator owners to con- tribute to FONIVEMEM illustrate the Kirchner administration’s antagonistic relationship with foreign utility firms. At the same time, they also indicate a grudging acknowledgment of the financial and technological constraints that prevent outright re-nationalization of the electricity sector and its return to the public sector. Instead, the Kirchner administration appeared to be trying to establish a system whereby the discretionary powers of private firms are circum- scribed and the government assumes a preponderant role in directing invest- ment decisions. Given that throughout the 1990s the reliance on natural gas to generate elec- tricity in Argentina increased so dramatically, it is no surprise that the electrici- ty sector has also been negatively impacted by the increasing shortages in natu- ral gas in the country since 2004. In addition to importing natural gas and sub- stitute fuels, the Argentine government has also been forced to use the conver- sion plant located in Garabí (just over the Argentine border in the southern Brazilian state of Rio Grande do Sul) that connects the Argentine and Brazilian grids to import electricity from Brazil. This is a particularly ironic turn of events given that Garabí was built in 2000 primarily to support Brazil’s hydro-depend- ent electricity grid with what was then thought to be cheaper, more abundant, and more reliable Argentine natural gas-generated electricity. CONCLUSION President Néstor Kirchner’s failure to fully restore the market mechanism for setting prices for energy consumption in Argentina may have facilitated his wife’s election as president, but it now means that the burden for restoring price equilibrium will fall squarely on her shoulders. Given energy shortages in the winter of 2007 that forced halts in production and are already eating away at Argentina’s recent impressive gains in GDP, Cristina Fernández de Kirchner will have no choice but to act early on in her administration, particularly if winter in 2008 is as cold as it was in 2007 and the drought in the Southern Cone per- sists. Adding to the need to take immediate action is the fact that Bolivia halved the amount of natural gas it committed itself to export to Argentina in 2007 and faces even greater supply constraints in 2008. The political calculation is that she will act early in her term so as to permit enough time for memories of the pain of the restructuring to dim before she or her husband decide to announce a decision to run again in 2011. One thing that may help President Fernández de Kirchner is the fact that the biggest beneficiaries of pesification and the price freeze on energy rates have been the middle class. This is the same group that has also benefited from the economic recovery that the country has experienced since 2003. Presumably their pocket books are now fuller and bank accounts replenished, so they are less likely to take to the streets if energy prices sudden- ly increase. In addition, if domestic supplies begin to increase as a result of restored market based incentives to invest, the government could compensate for the higher electricity prices by lowering the hefty taxes it currently charges through utility bills.2 Up to now, the revenue raised from those taxes has been used to finance the purchase of imported natural gas, electricity, as well as sub- stitute fuel oil. Interestingly, the poor in Argentina—the presumed base of the Kirchners’ Justicialista party—primarily use liquefied petroleum gas (LPG) that comes in metal containers, and prices for LPG were never frozen. NOTES 1. In October 2006 Argentine President Néstor Kirchner and Bolivian President Evo Morales signed a new agreement under which Bolivia guaranteed to provide Argentina with 22.7 million cubic meters of natural gas per day for the next 20 years. In return, Argentina agreed to pay a higher charge than it had previously been accustomed to of five U.S. dollars per million BTU’s, although this price was to be adjusted every six months based on comparative prices for diesel and fuel oil. Since 2004, Argentina has also used Petróleos de Venezuela SA as a broker-financier to import fuel oil in order to operate older thermal plants in coastal Argentina or the newer dual combination ther- mal plants that can operate on either natural gas or fuel oil. 2. It is estimated that in 2003 some 33 percent of the average residential end user’s bill in Buenos Aires represented taxes, while in the case of Entre Rios more than 60 per- cent of the electricity bill was made up of taxes. 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