April 8, 2008 / 6:21 PM / 11 years ago

Argentina, Brazil may see change in Paraguay dam deal

ASUNCION, April 8 (Reuters) - South American giants Argentina and Brazil are grappling with energy shortfalls as their economies roar, and could soon face calls to pay more for key power supplies from their poor neighbor Paraguay.

Both regional powerhouses jointly own hydroelectric plants with Paraguay and benefit from decades-old deals that provide them with electricity at cut-rate prices.

But some political leaders in Paraguay, including the front-runner in the country’s April 20 presidential election, are clamoring for a new pricing deal.

The call comes as many Latin American countries are strengthening state control over their natural resources to reap economic benefits from record-high commodity prices.

For landlocked Paraguay — which has few resources other than abundant fresh water — that means launching a difficult challenge to its two bigger and more powerful neighbors, some analysts say.

“They also thought it was impossible for Panama to renegotiate the canal ahead of time,” said Fernando Lugo, a left-leaning former bishop who is the favorite in Paraguay’s presidential race. The United States handed over control of the Panama Canal in 1999.

“We’re just asking for what’s fair,” he added.

Stretching over the Parana River that marks Paraguay’s borders with Argentina and Brazil are the Yacyreta and Itaipu dams, which Paraguayan officials once hoped would bring prosperity to one of South America’s poorest countries.

Co-owned with Brazil, Itaipu is one of the world’s largest hydroelectric plants.

It has also been the focus of Paraguayan newspaper editorials and Lugo’s claims that Brazil is not paying a fair price for surplus power generated at Itaipu, which Paraguay is forced to sell to its neighbor at prices set decades ago.

“It’s not remotely close to today’s market price,” said Ricardo Canese, an energy analyst and aide to Lugo.

‘ONLY NATURAL RESOURCE’

Brazil and Paraguay teamed up to build Itaipu — considered one of the modern engineering wonders of the world — more than 30 years ago when both countries were ruled by military dictatorships.

A 1973 treaty establishes that each country owns 50 percent of the energy produced and that Paraguay, which consumes 7 percent of the total output, must sell its excess amount to Brazil. Power from the dam goes to southern Brazil and accounts for 20 percent of the country’s total consumption.

Brazilian authorities reject the calls for a new price deal, saying it would change the conditions put in place to ensure the dam was built. Brazil helped back many of the loans needed for the dam’s construction.

“Brazil signed a treaty that assures equal rights, and it was an excellent deal for Paraguay,” said a document by the binational company that administers the dam.

Paraguay receives about $400 million a year from its sales to Brazil, but some critics say the proceeds are often lost to government corruption.

Argentina and Paraguay operate the Yacyreta dam, which was largely financed by Argentina in the 1980s. Argentina uses almost all of the power generated under a similar price scheme, but Paraguayans say Buenos Aires has shown less resistance than Brasilia to a possible price change.

Canese said by not seeking a price modification, Paraguay was failing to protect one of its few natural resources.

“Without Paraguay’s hydroelectric energy, Brazil and Argentina would have to burn 90 million barrels of oil a year. At an average price of $100 a barrel, we’re talking about a cost of $9 billion dollars,” he said.

“Paraguay is missing out on a chance to benefit from the only natural resource it has,” he said.

Additional reporting from Daniela Desantis; Editing by Eric Beech

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