Oct. 17 (Bloomberg) -- Cia. Energetica de Minas Gerais, Brazil’s second-largest power generator, is challenging President Dilma Rousseff’s plan to cut electricity rates that are among the highest in the world.
Cemig, as the utility controlled by Minas Gerais state is known, rejected a push to renegotiate three licenses accounting for half of its generating capacity, saying it violates terms of contracts it signed in the 1980s. Chief Financial Officer Luiz Fernando Rolla said yesterday on a conference call with analysts that the concessions should be automatically renewed under previous rules.
The move by Cemig, whose largest minority shareholder is BlackRock Inc., underscores the obstacles Rousseff faces in her drive to cut electricity rates by as much as 28 percent to make local manufacturers more competitive and spur growth. Cemig is likely counting on congressional support to reject some of the conditions set by Rousseff in favor of the existing system, Banco do Brasil SA analyst Rafael Dias said.
“It’s a bold move,” Dias said in a telephone interview from Sao Paulo. “If they succeed, you can bet others may follow the same path.”
As growth in Latin America’s biggest economy has slowed, Rousseff’s administration has been shifting its focus from stimulating consumer demand to lowering costs of business that deter investment. She unveiled her energy plan in September asking companies to cut rates on electricity as of Jan. 1 as part of conditions to renew concessions set to expire by 2017.
Utilities submitted preliminary requests to renew 106 licenses under the plan by an Oct. 15 deadline, Andre Pepitone, a director at electricity regulator Aneel, told reporters in Brasilia yesterday. Cemig didn’t apply for renewal of the Sao Simao, Jaguara and Miranda dams. Fourteen other license extensions also weren’t submitted, he said.
“We are not counting on any alternative other than getting the concessions renewed,” CFO Rolla said, adding that he doesn’t expect to have to challenge the new rules in court. “Our understanding is that contracts should be respected.”
Deputy Energy Minister Marcio Zimmermann said Cemig’s failure to submit the licenses for renewal means the government can keep them or hold a new auction for the rights. Cemig risks losing the licenses altogether should it fail to get backing from lawmakers, said Rio de Janeiro-based Ativa Corretora’s analyst Ricardo Correa.
Cemig’s move was “unexpected,” Correa said in a telephone interview yesterday. “They are trying to take advantage of a gray area of the rule, a loophole.”
Cemig rallied as much as 6.2 percent yesterday, the biggest intraday gain since November 2008, on analysts’ expectations the utility may retain the right to charge higher rates. It fell 2 percent to 25.38 reais at 4:05 p.m. in Sao Paulo.
The utility posted a 9.2 percent sales gain in the second quarter to 4.41 billion reais ($2.17 billion).
“The company’s managers and main shareholders have again proven that their decisions are focused on adding value,” BTG analysts Antonio Junqueira and Joao Pimentel in Sao Paulo said in a report. The decision signals that “Cemig will still fight for the automatic renewal rights for the three plants.”
BlackRock declined to comment in an e-mail.
Banco Espirito Santo SA raised the target price for Cemig to 27 reais from 23 reais and boosted its forecast for average earnings before items in the next two years by 29 percent.
State-run Centrais Eletricas Brasileiras SA is among the utilities that said they are interested in renewing all their licenses under the plan.
Most existing Brazilian electricity concessions set to expire by 2017 were previously renewed automatically at least once. The three permits Cemig left out of Rousseff’s plan are among the few that would be renewed for the first time, making it easier for the company to claim it has the right to an automatic extension, Dias said.
The lower rates would make it harder for Cemig to meet its supply contracts, Chief Executive Officer Djalma Bastos de Morais said at a conference in Sao Paulo yesterday.
“I’m confident the government will use common sense,” CFO Rolla said. “As a company that invests and believes in Brazil, that’s all we can expect.”
To contact the reporter on this story: Lucia Kassai in Sao Paulo at email@example.com