December 5, 2012 / 12:56 AM / in 5 years

UPDATE 2-Brazil utilities force gov't to accept smaller rate cut

* Brazil gets rate cut of 16.7 pct, less than 20 pct target

* Utilities in Sao Paulo, Minas Gerais, Parana, reject offer

* Aim is to lower costs, boost efficiency

By Leonardo Goy

BRASILIA, Dec 4 (Reuters) - Brazil will have to live with a smaller-than-hoped-for drop in electricity prices next year after several utilities rejected a government offer for early renewal of their power concessions in exchange for charging lower rates.

Average power rates in Latin America’s biggest country, and one of the world’s most expensive electricity markets, will fall by 16.7 percent after some of Brazil’s utilities agreed to accept the offer. The government had hoped rates would drop by as much as 20 percent before some utilities declined to participate.

At stake are efforts by President Dilma Rousseff to tackle some of the high costs that make business and industry in Brazil more expensive and less efficient than in many other major economies. Like high labor costs, poor infrastructure, and red tape, expensive electricity has long been considered a handicap for Brazilian competitiveness.

Earlier this year, President Dilma Rousseff devised a plan to tackle the energy problem: She would offer early renewals to power companies on many existing energy concessions and ask them to slash rates in return. The concessions, the right to operate a power plant or distribution lines through 2017, are for hydroelectric dams and transmission nationwide.

Though economists lauded the effort at a time when Brazil’s economy could use a boost, the plan raised hackles among investors and managers of the utilities with existing concessions. Opponents of the effort said the reductions would slash revenue, profit and investment to a level that could cripple the industry.

“We can’t accept the difference,” said Jose Anibal, energy secretary for the state of Sao Paulo, which controls Companhia Energetica de Sao Paulo, or Cesp, which rejected the offer for some of its concessions. He was referring to a 5 billion real disagreement with the federal government over compensation Cesp would have received as part of the plan.

Companhia Energetica de Minas Gerais, or Cemig, and Companhia Paraense de Energia, or Copel, also rejected the offer for some of the dams in their portfolios. Like Cesp, those two companies are run by states, Minas Gerais and Parana, respectively, that are governed by the chief opposition to Rousseff’s ruling Workers’ Party.

That made some in the government criticize the rejections as politically motivated. “They were extremely shortsighted in those states,” said Mauricio Tolmasquim, director of the EPE, a federal energy research institute. “They are risking losing assets that are fundamental for those companies.”

When existing concessions expire, the dams revert to government control and will be re-auctioned to the highest bidder.

Consumers and business groups have long pushed for lower rates. In a statement late Tuesday, the Federation of Industries of the State of Sao Paulo, one of Brazil’s leading business organizations, criticized the utilities that declined to renew their concessions.

The group accused those companies of “not collaborating to help Brazil become a more competitive country.”

Private investors in utilities have shown little desire to see rates fall. Shares of Eletrobras, a federally controlled holding company that agreed to the early renewals, have lost more than 60 percent in market value since Rousseff first announced the plan.

The company, Latin America’s largest utility, on Tuesday said the new landscape will force it to revise investment projects and that it will present a new business plan to its board early next year. Among other changes, the company said it would have to alter plans to expand and diversify through operations in other countries, a move many shareholders supported.

The government had an easier time getting transmission companies to agree to its plan. Utilities opted to renew 100 percent of expiring electricity transmission contracts under the program.

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