NERA was retained by Duke Energy International (DEI) to analyze several new market structures to identify market design, regulatory, or implementation problems that have acted to discourage investment in generation capacity in these new markets. This paper presents the results of our assessment. The authors reviewed the California power market arrangements because of the obvious problems that have captured the attention of most of the world, or at least those interested in electricity issues. They then assessed the Brazilian reform model to see if similar problems could or did arise and if any problems were inherent in the process of reforming power sectors. Finally, they considered possible ways to resolve problems.

The authors observed that the current approach of joint private/government involvement in Brazilian projects is not sustainable over any reasonable investment horizon. Therefore, Brazil must ultimately rely on projects that are supported only by private investors (“purely private investment”). But to achieve success in this direction, a number of problems that did not arise in California but have arisen in Brazil must be resolved. All of these issues relate to the quality of the investment environment in Brazil. In this context, the authors find that there is a lack of purely private investment in Brazil; which if not resolved, will result ultimately in an inadequate power system for the country.