Canada Pension Plan

Probe International reply to Canada Pension Plan Investment Board

Patricia Adams
Probe International
June 17, 2009

Dear Mr. Denison,

Please find below for your consideration our response to Mr. Babak Abbaszadeh’s March 30th letter regarding Transelec’s proposed transmission investment in connection with HidroAysén’s hydro development in the Patagonia region of southern Chile.  His March 30th letter was in response to our letter of February 28, 2009 to you. You will see in our response below that we also rely on the May 15, 2009 letter to you from the Consejo de Defensa de la Patagonia Chilena (Patagonia Defense Council – PDC).

CPPIB: Your enquiries about the proposed project and the status of its environmental approvals should be directed to HidroAysén directly.

Last August, HidroAysén submitted its Environmental Impact Assessment to the environmental authorities for its proposed hydroelectric dams in the Patagonia region of southern Chile. The EIA excluded the transmission component of the project, which would be developed by Transelec and includes a 1,500-mile long transmission line and related infrastructure crossing through 14 legally protected natural areas and thousands of private properties, around volcanoes, and over fjords spanning, in all, more than half of Chile’s entire length.

Under Chile’s current environmental regulatory framework, the generation and transmission components of the HidroAysén development have to be evaluated separately because the proponents of each are different. Because of this absurd regulatory technicality, the total environmental impact and cost of the HidroAysén project, including the dams and the associated Transelec-owned transmission line, cannot be accurately calculated or compared with the cost and impacts of alternative electricity investment options.

Even worse, if the generation component is approved for construction without first assessing the total cost, including transmission, the regulatory authorities would be compelled to approve the transmission line as an essential element of the project. A subsequent and separate EIA of the transmission line would be a mere formality and an administrative farce. You may be aware that a group of lawyers in Chile, called Attorneys for the Environment, took legal action last August, asking a civil tribunal in Santiago to suspend the HidroAysén EIA proceedings until an environmental assessment of the related transmission line is presented. In response, the tribunal launched an inquiry into the legality of excluding the transmission component of the HidroAysén project from the EIA proceedings.

You will appreciate that this arbitrary and illogical division of one project into two, and the regulatory sequencing of approvals – first the dams, then the transmission corridor — with the latter being a fait accompli once the former is approved, seems rigged to circumvent a proper and thorough cost-benefit assessment of the project as a whole.  For Chileans, this is surely an act of bad faith, and is guaranteed to produce an incomplete, and therefore, flawed assessment.

CPPIB: Transelec S.A., a company in which we are a minority investor, is not the developer [of the proposed dams in the Patagonia region of Chile].

Without an investment agreement with Transelec, the HidroAysén project could not proceed. Without Transelec’s agreement to finance and build the necessary transmission infrastructure for HidroAysén’s dams, which could cost as much as the dams themselves, HidroAysén will not build the dams.

HidroAysén could not raise financing for its dams or deliver hydropower from Patagonia to market without Transelec’s agreement to transmit the power. As Chile’s national transmission provider with a de facto monopoly in long distance transmission, Transelec has a strong commercial interest in generation projects that require long distance transmission service and infrastructure. In fact, the regulatory framework for transmission assures Transelec that it will be able to recover costs plus a reasonable rate of return for investments in long distance transmission. So, while Transelec is not the developer of the dams, it has a clear bias in favour of long distance transmission and stands to benefit from the dams’ construction. It is therefore not an impartial participant in the regulatory process.

Transelec’s largest client is Endesa, which has a de facto monopoly in generation and is the country’s largest power producer and part owner of HidroAysén, the joint venture company planning to build the five large hydro dams in question. Moreover, Transelec’s 2008 report indicates that the company’s growth strategy is based on becoming “a strategic partner in the execution of whatever energy developments the market requires.” Transelec already has a number of investment agreements with Endesa. In fact, more than 70 percent of Transelec’s income comes from providing national transmission services to Endesa and its subsidiary companies operating large hydro dams on the Bio Bio River.
Therefore, Transelec is both an essential party to the development of the five dams planned for Patagonia and a proponent of the transmission lines needed to accommodate the dams’ output.

CPPIB: Transelec will continue to provide information to key stakeholders about how electricity transmission solutions can assist in the delivery of power, from a variety of sources, including renewables.

Contrary to CPPIB’s statement that Transelec will provide this information; Transelec has done just the opposite.

According to information provided by Patagonia Defense Council researchers, some 1,600 petitions for exploratory mining concessions have been applied for, or secured, covering 300,000 hectares of land that, lined up, end-to-end, correspond to what could be the Transelec transmission corridor. Transelec has not informed the Chilean people of this. Rather, a recent press report quoted General Manager of HidroAysén, Hernan Salazar, confirming that Transelec has indeed secured these concessions, adding that the practice is “standard” for this kind of project and in no way illegal.

According to the Chilean Constitutional Mining Law and the Mining Code, the permit beneficiary can “taste and dig” in a site. It is neither necessary to present a project nor prove that the ends sought are related to mining.

“In terms of jurisprudence, this is an abuse of the law,” says Felipe Meneses, a lawyer for Chile Ambiente. Transelec is using the mining law for an end that is not intended, he explains. “They say they are protecting their investment, because they don’t want others to use mining concessions to halt their project.”

Meanwhile, the Chilean public is kept in the dark.

Critics also point out that this use of the “mining shield” has speculative advantages for Transelec because the existence of a mining concession on a parcel of land devalues the land and diminishes the cost of compensation, leaving the owners without legal recourse to recoup their losses.

You will understand that Chilean citizens are outraged by Transelec’s behaviour.

So, too, I believe, will Canadians be outraged by this secretive, bad faith treatment of Chilean citizens by Transelec, the company in which 17 million Canadians have become involuntary investors.

CPPIB: We believe that the democratically elected government of Chile takes environmental issues very seriously and has processes to determine the local balance between economic development and environmental protection.

Governments everywhere have to do more than hold elections to ensure environmentally and economically sound decisions are made and the rights of their citizens are upheld, particularly when electricity markets are controlled by private monopolies, as is the case in Chile. The decision-making process governing large-scale electricity generation and transmission projects in Chile has been widely criticized by Chileans themselves as “not transparent, political rather than technical, and overtly influenced by the proponents of the projects.”

As the Patagonia Defense Council points out, the unprecedented concentration of ownership in the hands of a few companies “creates serious problems for democratic governance in Chile . . . [and] inevitably co-opts politics, politicians, media, academia, and the courts of justice.”

Transelec operates within this highly politicized regulatory environment. Two companies control Chile’s electricity supply market: Endesa-Chile and Colbun. Transelec’s business depends upon serving these monopoly interests and the interests of its shareholders, not necessarily the interests of ordinary power consumers and citizens in Chile. That is why Transelec must subject its plans to public scrutiny without further delay.

CCPIB: Transelec is interested in connecting renewable sources of power to the electricity transmission grid in Chile and … if you know of credible power generation projects, we would like to be made aware so that Transelec can engage with the developers.

Transelec will know that Chile has plenty of “credible” alternatives to mega hydro projects. Chile’s National Energy Commission recently approved generation projects worth more than double the current installed capacity – 13,962 MW – to meet the country’s needs between 2009 and 2025. In addition to this, experts have identified another 2,719 MW and 4,565 MW of viable energy efficiency and renewable energy projects, respectively. For details, I refer you to the May 15 letter from the PDC to your office and to the work they reference from the Universidad de Chile.

The problem isn’t that Chile lacks alternatives to the Patagonia dams. The problem is the market structure and regulatory framework has stifled competition from alternatives  (i.e. industrial cogeneration, decentralized renewables). As is, HidroAysén is not required to compete with other would-be power producers in the Patagonia region or elsewhere for access to consumers. Nor is HidroAysén required to disclose the total cost of its project, including Transelec’s component.

Transelec will also be aware that HidroAysén’s parent company holds virtually all water rights to rivers in the Patagonia region, which effectively rules out competition from smaller-scale, run-of-river, less environmentally damaging hydro developers.

CPPIB: The debate around energy development in Chile is a difficult one, but one we believe is best addressed by the people of Chile themselves and their democratically elected government.

The people of Chile have expressed their opposition to HidroAysén’s dams and Transelec’s related transmission infrastructure in three recent surveys with national coverage. The latest one, in April 2009, by IPSOS found that 57.6 percent of Chileans do not agree with the mega hydro project in Patagonia and its associated transmission lines.

In conclusion, we wish to state that we are not opposed to private investment in the electricity sector: indeed, we support such investments provided the industry is competitive, a transparent regulatory regime is in place, costs are internalized, and property rights are guaranteed under the rule of law. This is not the case in Chile. Rather, Transelec can build a long distance transmission corridor that is viable only with monopoly control, vulnerable to serious operational interruptions, and cause widespread environmental losses and social upheaval, yet still make a good rate of return because the regulatory framework will pass the costs and risks on to Chilean citizens.

Ultimately, we believe this proposed US$2 billion investment would be uneconomic and environmentally damaging, and Canadians will see it as a poor investment on which to stake their pensions. We urge you to abandon it.

Should you choose to proceed with the investment in this dam scheme and transmission corridor, we will continue to press for the full disclosure of all costs and risks associated with this project.

So that we may keep concerned Canadians and Chileans informed about CPPIB’s position, we look forward to your reply at your earliest convenience.





Patricia Adams
Executive Director



Babak Abbaszadeh, Director, Stakeholder Relations, CPPIB, Canada
Juan Pablo Orrego, Director, Ecosistemas and Patagonia Defense Council, Chile

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