Brazil is the only country in which US power company AES (NYSE: AES) holds telecommunications operations.

To understand the company’s strategy in the sector, the possible expansion of infrastructure services to other countries and the broadband over powerline offer in São Paulo, BNamericas spoke with AES Eletropaulo Telecom president Teresa Vernaglia.

BNamericas: How does AES Eletropaulo Telecom work within the group?

Vernaglia: In Brazil, AES is comprised of seven companies, including power generation and distribution, as well as the two telecommunications companies - one in São Paulo and one in Rio de Janeiro - and all have independent management.

In the telecoms companies’ case, even though they are in the same business, they are separate companies. When AES came to Brazil in 1998, it took part in a consortium for the acquisition of [São Paulo state power company] Eletropaulo and another consortium for [Rio de Janeiro state power company] Light. AES was majority owner in the São Paulo concession and in the unwinding of the cross holding of shares in Light, AES ended up without any electrical asset in Light, but did keep the telecoms operation. The brand Light stayed with the power concessionaire while the telecommunications company was named AES Com.

BNamericas: Is there any cooperation between the Rio de Janeiro and São Paulo companies? What is the size of the network?

Vernaglia: The engineering teams are very integrated, mostly in the planning part, network technology. The sales sectors work locally due to each market’s specific demands and dynamics, level of competition, as well as to guarantee the agility in servicing clients, which is very important for us and a differential for those which need last mile infrastructure.

The São Paulo network has installed capacity of around 200 gigabytes. A great part of this capacity is occupied and the network is 100% fiber optic and redundant. It has a topology which enables, in cases of failure, a redundancy to take over without affecting the high level of service. This network has implemented services in over 90% of the metropolitan demand for business connectivity in São Paulo. The São Paulo network has 2,000km and if added to the Rio de Janeiro one, there are over 4,000km.

BNamericas: Why does AES only maintain telecommunications operations in Brazil out of all countries it works in?

Vernaglia: In terms of the business model, Eletropaulo Telecom and AES Com have shown it to be viable in Brazil due to both companies’ positive results. However, at the time when these operations were built, AES also created other initiatives in other countries which did not work out. In Venezuela, the telecommunications company had to be sold due to the nationalization promoted by [President] Hugo Chávez.

BNamericas: Do you consider it possible for the international AES group to create other telecoms initiatives based on the Brazilian success?

Vernaglia: Yes, totally. Actually, there are already a few initiatives. In Africa, for example, the company has power distribution operations in countries which are very poor in infrastructure. The Brazilian group is already a reference within the group in terms of telecom, creating opportunities for local professionals to support this African market in implementation: the steps which need to be followed, investments, all the new business’ drivers.

One can imagine that many operators that work in Brazil will eye that market too. Therefore the business strategy starts to get very interesting - as AES is seeing growth potential there, other operators will too. This is a challenge for the holding, to catalyze other countries’ initiatives and [use synergies from] the Brazilian team.

BNamericas: Due to the natural trend of data traffic volume to grow in your network, do you need to constantly increase the capacity of the network? When is it worth expanding geographically to meet client demand?

Vernaglia: There are two pillars for expanding. One of them is according to increased consumption in the larger bands, then we have to expand the capacity of this implemented network. The other pillar is the expansion of capillarity according to new market demand.

It is worth expanding geographically when, as any infrastructure company, we generate profit. The company does not offer any other added value service and this is an important point. Also, infrastructure is becoming more and more critical - it is always on the edge. What justifies expanding to a new area is to be very sure that there will be a client to buy that capacity in that specific region.

As we have a lot of credibility with our clients, this move comes from them. They are the ones coming to us and asking for us to take our high quality services to other regions. Now we are going through a process of determining to which regions we should take our network with a guarantee of having these clients as our clients in the new locations.

BNamericas: How many clients does Eletropaulo Telecom have and how many cities do you cover?

Vernaglia: We have about 80 clients and 24 cities covered in the metropolitan region of São Paulo for a strategic reason - this is where we started building the network since the beginning of the operation. But we have a multimedia communications service license and we can operate anywhere we want in Brazil, and we are thinking of expanding our network to other cities in 2009.

BNamericas: What do you expect in terms of revenue and investment this year?

Vernaglia: In the past five years, we have invested about 70mn reais [US$30.5mn] and this year we expect to invest a total of 34mn reais to expand the network and increase capacity. We ended 2007 with over 70mn reais in revenues and we expect to grow above 30% this year compared to last year, maintaining a high Ebitda margin. It is a sustainable business, very important in this moment of liquidity crisis.

BNamericas: What about the broadband over powerline offer? Would you possibly offer service to end-users after telecoms regulator Anatel’s authorization?

Vernaglia: I am used to saying we do not suffer from identity crisis. We are all about infrastructure. However, it is obvious we aim to grow. As broadband consumption has been increasing, there is a demand for a higher capillarity of the network.

We have an engineering, planning and development team focused on how to make the network expansion viable to meet this demand within our business model and one of the options is BPL, a technology which enables us to expand the fiber optic capillarity guaranteeing a relatively faster expansion and meeting the expectations for bandwidth. We have been performing tests to look at this technology.

Anatel’s recent public hearing on the matter is a very important signal for us to continue testing because no technology will be deployed without a regulator looking at it.

At the point we are now, we can expand the capillarity very quickly as long as we prove everything right. The aim is to make infrastructure available with even more capillarity for operators to be able to promote broadband in residences. Our business is to provide connectivity so that operators can provide the services to end-users.

BNameircas: What has been generating the most business volume for the company?

Vernaglia: 3G, but not only that. The healthcare sector too, institutions which need to exchange images as laboratories have been consuming more bandwidth in the business area. This neutrality is very important to gain clients, it is a trust relationship because we will never steal our client’s clients and because they can count on our stable network. It is always available.

ABOUT THE COMPANY:AES Eletropaulo Telecom’s main business focus is to provide high availability and reliable solutions for local access in the São Paulo metropolitan region for fixed and mobile telephony operators.

The company works principally with businesses in the metropolis, providing high speed voice, data and image traffic.

Eletropaulo Telecom is part of one of the world’s largest power companies, AES, which owns and operates a diverse and growing portfolio of generation and distribution businesses with the capacity to serve 100mn people worldwide.

About Teresa Vernaglia

Teresa Vernaglia has been heading AES Eletropaulo Telecom since 2001, where she has been responsible for the consolidation and expansion of the company.

Previously, the executive worked for nine years in NEC do Brasil in the areas of implementation engineering, systems and business development in mobile telephony during the privatization process of the Brazilian telecoms sector. She also took part in projects in Japan, Italy and the US.

In 1997, the executive took over the engineering and operations department in Nextel, where she was responsible for a countrywide coverage network for five years.

Vernaglia graduated in electrical engineering with an emphasis in telecommunications, and she also has an MBA.