Crunch Time For Argentina Govt As Energy Crisis DeepensLast update: 6/22/2007 1:58:26 PMBy Michael Casey Of DOW JONES NEWSWIRES BUENOS AIRES (Dow Jones)--It was hardly a revelation for factories paralyzed by power and gas rationing this week, but Argentine President Nestor Kirchner's admission late Thursday that "problems" exist in the energy sector was still something of a watershed moment. Interior Minister Anibal Fernandez had days earlier taken the same line the government has taken since gas and power shortfalls were first identified three years ago and denied the existence of an energy crisis. But by the time the president spoke Thursday at an auto industry event, denying the seriousness of the situation was difficult. Taxi services were stalled by cuts in compressed natural gas. Countless heavy industry plants had suffered temporary shutdowns. Dairy producers - already attacked for an undersupply of milk - were warning that power cuts threatened new production problems. And, in a development with political connotations, the first power outages for residential users were felt Thursday, when gated communities in outer Buenos Aires were told to cut common area usage. All this, Kirchner told his audience, is mostly because Argentines are victims of their own success. "In April, we grew at 8.4%, with an accumulated annual rate of 8.1%. This, clearly, generates problems. We have problems in the provision of electricity, in energy." The uncooperative cold weather hasn't helped, either, he added. "We had a lot of water, it snowed a lot, but we didn't have the thaw to get the water needed and this has generated problems that we did not expect." This was a different spin on the weather factor from that of analysts, who relate it to the problem of higher heating demand from households, which are privileged with gas rates among the lowest in the world and have priority access to supply. Either way, the immediate question for Kirchner is whether voters, now feeling for the first time the direct impact of a long-running problem, will accept his apportioning of blame. Presidential elections are scheduled for October, for which a possible litmus test looms on Sunday, when Buenos Aires City residents will vote for a new mayor. The frontrunner is a conservative opposition leader who is critical of Kirchner. Many are skeptical. The cold weather reflects "an external factor but it was hardly imponderable," says Javier Alvaredo, economist at MVA-Macroeconomia. "Basically, the government has been patching over the problem and now we are arriving at this situation at a critical moment." Like many other economists, Alvaredo believes the solution would have been to have earlier ended a five-year rate freeze on residential power and gas users to promote private investment in the sector. Now, given the time-lag involved in bringing new power and gas production on line, it's too late, he says. "Raising prices is not going to produce an immediate solution" to the investment shortfall, Alvaredo said. Rather, he recommends forced savings program: making offices turn off lights and computers after-hours, introducing sanctions to raise public transport use and turning off street lights. The government's "patches" to the problems when they first emerged in 2004 focused on two infrastructure concerns: gas transportation capacity and power generation. First, it cut gas supplies to the most expendable of Argentina's customers: Chile. Then, it set up some complex trust fund vehicles to steer private investment into a new gas pipeline and two new thermal power plants, while it raised the capacity of a hydroelectric dam on the Paraguay border and drafted plans to expand a nuclear power facility. Most importantly, the government struck an accord with Bolivia to revive Argentina's intake of gas from that country and phase in contract expansions to an eventual 27.7 million cubic meters a day by 2010. The plan ran into obstacles. There were delays in the trust fund financing, as some of the biggest players balked at participating. And construction of a gas pipeline was held up by bureaucratic complications arising out of a bribery scandal involving Swedish construction firm Skanska. And just this week, Bolivia has sharply cut gas supplies to Argentine in favor of meeting rising domestic demand. Since that means it is already failing to comply with an interim contract for 7.7 million cubic meters a day, many wonder how it will bring on line a further 20 million cubic meters scheduled under the existing accords for 2010. For now, the government's focus is more immediate. It must make it through to the elections. After that, many analysts believe, all bets are off in energy policy. Indeed, Argentine power companies' shares have surged this week as investors have bet that the crisis will lead the government to hike rates when it is more politically feasible to do so after October. Power distributor Edenor SA (EDN) is up 10.3% on the week, with its American Depository Shares last quoted at $21.89, while affiliate Pampa Holding SA (PAMP.BA) was up 4.4% at 2.80 pesos ($0.91). However, as Buenos Aires residents prepare for a mayoral election in which opposition leader Mauricio Macri is seen as the clear winner, Kirchner is under pressure to be held accountable for the problems before the October elections. Addressing diesel shortage concerns, the Argentine Rural Confederation, a body representing farmers, topped a critical press release Thursday with the title, "If the government says all is well, why is everything so bad?" Others statements from a business sector that's typically wary of attacking the government were less overtly political. Nonetheless, they contained warnings about the threat to Argentina's economic outlook. The energy "situation is going to weigh on GM's investment decisions," a spokesman for General Motors Corp. (GM) told Dow Jones Newswires Thursday. This was a reference to the company's deliberations over a Latin American production site for a new model car earmarked for daily output of 110,000 units. Argentina, Brazil and Mexico are on GM's short list. Meanwhile, the Argentine Association of Auto Parts Producers, AFAC, said in a statement that gas outages at its members' plants put the sector at risk of not complying with export commitments worth more than $4 billion. -By Michael Casey, Dow Jones Newswires; michael.j.casey@dowjones.com; 54-11-4313 1918 (END) Dow Jones Newswires