January 18, 2007
Dennis W. Bakke remembers Venezuela's President Hugo Chavez as a charming conversationalist. Chavez loved to talk about baseball and closely followed the fortunes of Venezuelan players in the U.S. major leagues.
And when it came time to talk business, Chavez was supportive. Bakke, then chief executive of AES, wanted to know what the populist leader of Venezuela thought about an Arlington power-generation company spending about $1.7 billion to buy a controlling stake in the Caracas electric utility.
"He was very reassuring," Bakke says. On April 28, 2000, after one of their meetings, Bakke and Chavez emerged from the presidential residence La Casona all smiles, according to one newspaper report. Chavez called Bakke a "revolutionary entrepreneur who wanted to invest in Venezuela." Bakke said he had come to Caracas to "learn how to be a revolutionary businessman."
Seven years later, no one at AES is smiling, and there was nothing reassuring about the Jan. 8 announcement by Chavez that he would nationalize the telecommunications and electric utility industries, including the 82 percent AES stake in the Grupo La Electricidad de Caracas (EDC). The minister of mines and energy, Rafael Ramirez, said on Monday that it was a "reasonable" goal to take over EDC by June as part of a nationalization in which at least four utilities could revert to state control.
Ramirez didn't say how the Venezuelan government would compensate AES or other investors, but the mere talk of nationalization has knocked $138 million, or 15 percent, off EDC's market capitalization on the Venezuelan stock exchange. AES stock dropped as much as 5.4 percent after the announcement, though it has since rebounded.
"Taking risks is what business is all about," Bakke said in an interview yesterday. "The question is how much risk you take." In this case, he said, "we took too much."
Forbes magazine at the time said the AES move was "perplexing," noting that other investors were fleeing because they saw Chavez as an unpredictable, self-styled revolutionary autocrat. But Bakke, now retired from AES and running a chain of charter schools, said the opinion of AES executives and directors was unanimous back then.
"Now I think it was a mistake," he said. "Not so much doing it; you're going to make mistakes. You'd like to be smarter about how big a mistake."
Ramirez suggested that Chavez had "serious complaints" about the way AES has been running the utility, but Michael Shifter, vice president of the Inter-American Dialogue, said AES has simply been caught in Venezuela's political vortex. Since his inauguration last week, Chavez has moved to tighten control of a major private TV station and said the state would soon take majority interest in four international oil projects. Flush with oil revenue, Chavez has shown little concern for plummeting foreign investment.
Critics say that the government's plan to create a new state power firm, 40 percent owned by the state oil company, is a recipe for inefficiency. El Nacional, a major newspaper in Caracas, reported yesterday that official data show that in 2006, EDC had the lowest number of blackouts of any of the country's 11 electricity companies. The paper said that in 2006, there were 148 hours of service cuts. By comparison, Cadafe, the most inefficient of six state-owned firms, had 34,536 hours of cuts, the paper said.
"It is very hard to find an economic rationale for these decisions," Shifter said. "This is arbitrary autocratic rule. Chavez makes his decisions according to a political calculus."
Back in 2000, that political calculus was different. EDC was founded in 1895, and Chavez was happy to have local investors, most of whom opposed his presidency, bought out. Local stock markets, in a slump since Chavez took power, rebounded after the AES investment. And Chavez was impressed by Bakke, a devout Christian who still believes that "the purpose of business is not making money or making a stock price go up, but to do something wonderful for society . . . in an economically sustainable manner."
Asked about the AES investment by a Venezuelan newspaper in May 2000, Chavez said, "I do not have to meddle in that, because I consider it strictly private." He said the company's executives "displayed a quite progressive vision."
For AES at that time, there were reasons to take the risk. Because so many foreign investors were nervous about Venezuela, the price of EDC shares was attractive. EDC paid out $184 million in dividends to AES in 2004 and 2005, according to the AES Web site. EDC has generating plants, about 2,600 employees and more than 1 million customers.
Bakke said the EDC investment was one of a handful made during his tenure that violated his own guidelines limiting AES's exposure in any one place.
Current AES chief executive Paul Hanrahan, who was a key player in the Venezuela deal in 2000, and other AES officials declined to comment for this article. But today the company is more diversified than ever, with 121 power generation projects in 26 countries and 14 distribution companies. And Hanrahan says the company expects to devote about 30 percent of its capital spending in the next five to seven years to alternate energy projects. (The chairman of the AES board is now former federal budget director and Carlyle Group partner Richard Darman; one of the directors is Charles Rossotti, former Internal Revenue Service commissioner.)
The breadth of AES operations today has cushioned the impact of the Venezuela news, but it could still be substantial. Shelby G. Tucker, a utility analyst with Bank of America, told investors that if AES does not get any compensation for EDC, it would lose about $1.5 billion, or about 10 percent, of its value. But the minority investors in EDC are Venezuelans, and analysts think Ch?vez will want to compensate them. "All signs are that the government intends to push forward and wants to give fair value for the assets," said Guilherme Paiva, a Latin America equity analyst for Deutsche Bank Securities. "Now what is fair value? That is the million-dollar question."
Correspondent Juan Forero in Caracas contributed to this report.