Brazil is forcing power utilities to cut rates that manufacturers say are the fourth-highest in the world in a bid to boost competitiveness.
President Dilma Rousseff said today that businesses could see their electricity bills fall by more than the 28 percent previously announced as part of her plan unveiled today to renew existing licenses of power companies including Companhia Energetica de Sao Paulo and Centrais Eletricas Brasileiras SA.
“The time has come to give back to society the benefits for paying for investments through a lower, just and balanced tariff,” Rousseff told executives from the energy industry at an event in Brasilia. “Cheaper energy means lower production cost and more resources for investments.”
As growth in Latin America’s biggest economy has flagged, Rousseff’s administration has been shifting its focus from stimulating consumer demand to attacking the high costs of business that have long deterred investment. Today’s energy reduction plan is part of a “new phase” of Brazil’s development that also include payroll tax cuts for select industries and the auctioning of licenses to manage roads, railways, ports and airports, Rousseff said.
Lower utility rates will also help Rousseff tame inflation, which has remained above the government’s 4.5 percent target since September 2010. Finance Minister Guido Mantega said today that the cut in electricity costs for households and businesses will shave between 0.5 and 1 percentage point off inflation starting next year.
Power generators and distributors fell as investors bet that the license renewal terms offered by regulators will be unfavorable.
Cia. Energetica de Minas Gerais, Brazil’s largest utility by market value, fell 1.5 percent to 34.57 reais at 12:11 p.m. in Sao Paulo. State-run power generator and distributor Centrais Eletricas Brasileiras, better known as Eletrobras, fell 1.2 percent and Cia. Energetica de Sao Paulo fell 0.3 percent.
“The market already absorbed a good part of the negative expectations, but an additional drop in stock prices is possible,” Marcos Severine, utilities analyst at Banco Itau, said in a telephone interview from Sao Paulo. “We have to wait to see the parameters of these projects.”
Still, analysts are divided on how the policies will affect companies’ bottom lines. Marcio Loureiro, senior equity analyst at Votorantim Ctvm Ltda, said the measures weren’t as severe as the energy sector had expected.
“Company results could fall a bit, but nothing that is outside their investment plans,” he said by telephone from Sao Paulo.
Energy Minister Edison Lobao said companies that haven’t paid off required investments under existing licenses will be compensated.
Rousseff, in a nationally televised address to commemorate Brazil’s Independence Day last week, outlined her goal of reducing power rates by 16 percent for households and as much as 28 percent for larger consumers and manufacturers. Today, she said that the cost reductions, which will come about through tax breaks, could be even larger after regulators conclude a study of the industry’s performance.
Contracts affecting about 20 percent of Brazil’s energy generation and that are set to expire by 2017 will be renewed under the plan, she said. Companies that don’t accept the new terms offered by the government will have their concessions re-auctioned.
The main goal is to heighten the competitiveness of Brazilian manufacturers, who have lost market share to cheaper imports as a result of currency gains and rising labor costs in recent years, and more recently from weaker domestic and international demand. While industrial production expanded 0.3 percent in July, it’s still down 3.7 percent this year.
The cut on taxes charged consumers and the plans to maintain public investments in the industry will cost the government 3.3 billion reais a year, Treasury Secretary Arno Augustin said.
Today’s announcement “shows that industry requests had echo in the government,” Franklin Feder, Chief Executive Officer for Alcoa Inc. in Latin America, told reporters at today’s event.
Brazil’s industry pays an average of 330 reais ($162) per megawatt-hour, the fourth-highest rate in the world, according to the National Industry Confederation.
Benjamin Steinbruch, president of Sao Paulo-based steelmaker Cia. Siderurgica Nacional, said on Aug. 15 that a 10 to 20 percent reduction of electricity rates would be insufficient compared to much lower rates in the U.S. and China.
“Brazil is an expensive country,” he said Aug. 15.
Feder told reporters that with the rate cuts announced today Brazil’s production costs will be moving closer to the world average. He added that “it’s still early to guarantee Alcoa’s investments in the country.”