Brazil Drought Relief Seen Trailing Distributors’ Cost Increases

The Brazilian government’s pledge to help power distributors cope with the worst drought in four decades is set to fall short of their additional spending, according to data compiled by an industry association.

Authorities allocated 1.2 billion reais ($512 million) for companies such as Eletropaulo Metropolitana Eletricidade de Sao Paulo SA to cover January costs as low dam levels increase the use of more expensive thermo-electric plants, sending spot prices to record highs. The Association of Electricity Distributors calculates costs rose by 1.8 billion reais, said an association official, who isn’t an authorized spokesperson.

Consumer price caps mean distributors will have to burden the difference, with the government’s ability to intervene limited by budget and inflation targets, said Adriano Pires, director of the Brazilian Center for Infrastructure consulting firm. In February, the extra drought-related costs for distributors probably will be even higher, he said.

“If the government doesn’t increase energy prices, the fiscal gap for distributors widens and Treasury has to cover the difference,” Pires said by telephone from Rio de Janeiro after the relief program’s March 7 announcement. “If the government raises prices you start to have inflation problems.”

Eletropaulo shares fell 3.3 percent to 7.72 reais on March 7 and Light SA, which services the city of Rio de Janeiro, slumped 5.9 percent to 15.87 reais. Brazil’s Ibovespa Electricity index is down 13 percent this year, with all 15 index members posting losses.

Spot Surge

Eletropaulo didn’t respond to requests for comment made outside of normal business hours. A Light press officer said the company wouldn’t comment until it releases quarterly results.

Distributors have 3.5 gigawatt less than needed, forcing them to buy energy at spot market prices to meet their responsibilities and then resell it at government-capped prices to consumers. Spot prices are at a record 822 reais a megawatt-hour, according to energy trading board CCEE.

Brazil is budgeting a total of 9 billion reais for the CDE energy fund this year, which it will use to help utilities meet a March 11 deadline to pay spot-market commitments, according to the Mining and Energy Ministry statement. The government is considering more measures to aid utilities.

Dams in Brazil’s south-eastern and central regions, where the cities of Rio de Janeiro and Sao Paulo are located, ended February at their lowest for the month since 2001, the last time Brazil rationed electricity, according to national grid operator ONS. Dams in the southern region are at the lowest since at least 2000, when ONS records start. Analysts from Morgan Stanley to Citigroup Inc. and Banco Brasil Plural SA calculate a 20 to 40 percent chance of rationing.

Presidential Race

With President Dilma Rousseff up for re-election in October, the government probably won’t ration or increase prices, Pires said. Rousseff served as mining and energy minister under predecessor Luiz Inacio Lula da Silva.

“Because of the government’s inadequate policies, they’re leaving the sector in a delicate situation,” Pires said. “The government waited too long to try to solve this.”

The office of the presidency didn’t respond to an e-mailed request for comment made outside of normal business hours.

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