Exclusive: Brazil seeks business-friendly path to new power rate cuts

By Alonso Soto and Leonardo Goy BRASILIA (Reuters) - Brazilian President Dilma Rousseff is looking to cut power rates again, one year after her government shocked investors by strong-arming utility companies into reducing some of the world's highest electricity costs. This time the plan is to keep the peace with power firms, two officials involved in the discussions told Reuters. The government's move to pressure companies to lower charges in exchange for the renewal of their concessions last year helped ease electricity bills for household consumers. It did little, however, to slash costs for Brazil's industries and badly damaged Rousseff's rocky relationship with the private sector. "The intention was good, but the way last year's measures were carried out was wrong," said one official, who asked for anonymity to speak freely. "We have learned from that." The Rousseff administration has yet to figure out the details of how it will further cut energy charges. One of its options is to funnel more electricity into the open market where smelters and miners buy most of their energy, the two officials said. An increase in the supply of power in that market would push down prices on short-term contracts. Rousseff, a leftist economist, is striving to recover business confidence undermined by the heavy-handed intervention in the electricity sector. Brazil badly needs to attract new investment to bolster an economy that has lost its star appeal with three years of subpar growth. Her government has in recent months raised return rates on infrastructure concessions, lifted capital controls and vowed to rein in public spending. Critics say she continues to err by micromanaging the economy instead of allowing the free play of market forces. When the government strong-armed most companies into lowering tariffs last year, it set off a share selloff that cost power companies billions of dollars in market capitalization. State-run Eletrobras saw its stock plummet more than 60 percent. Utilities Cemig, Copel and Cesp declined to renew some of their concessions, which combined produce around 10,000 MW of electricity, roughly as much New Zealand's total power generation. The plan under study would earmark for the open market up to 40 percent of the energy produced by these concessions, which expire between 2015 and 2017, said one of the officials who works directly with the energy sector. In Brazil, roughly two thirds of the electricity is bought in long-term contracts at annual public auctions in the regulated market. The rest is traded on the open market. "Nothing will be done before we have a broad discussion with all the players in a way that is transparent, predictable and with all the legal guarantees," said the other official who works in industrial policy. In an email message to Reuters, the energy ministry did not deny or confirm whether the government is considering further energy rate cuts. DOUBTS LINGER Its change in tactics has been welcomed by the private sector, but there are still doubts as to whether the government will stop meddling in the economy, experts say. "The government's erratic policies have penalized the industry. These possible measures are a positive sign but the government needs to be more consistent," said Joisa Campanher Dutra, a professor at the Getulio Vargas Foundation and a former commissioner of Brazil's power regulator Aneel. Concerns over unilateral changes in the terms of contracts and excessive government tinkering with tenders have dampened investors' interest in multibillion dollar auctions for road, airport and railway concessions this year. The government denies it is interfering, but acknowledges that red tape is a major hurdle to getting things done in Brazil where industries struggle with faulty infrastructure, high taxes and rising output costs. Lower power costs are crucial for Brazilian industry to increase much-needed investment in the commodities powerhouse, according to big companies currently in talks with the government to slash electricity charges. "The government needs to fire up those animal spirits to get investments going," said Paulo Pedrosa, head of the country's association of large industrial energy consumers or Abrace. "Today those animal spirits look more like that of a house cat." Electricity bills for large companies have fallen about 7.5 percent so far this year, far short of the 32 percent promised by the government, according to an Abrace survey of its members, which include miner Anglo American, ArcelorMittal and General Motors Co. Some experts say the government should focus on lowering taxes to bring power costs down instead of bolstering the open market which does not necessarily guarantee cheaper energy. Hydroelectric plants meet about 80 percent of Brazil's electricity demand, which makes supply and prices vulnerable to the level of rain in some areas of the country. The open market price of electricity tripled early this year to more than 550 reais ($250) per MW/hour after a dry spell emptied reservoirs and raised the specter of rationing. Average prices in southeastern Brazil had stabilized to about 266 reais by late September, according to energy clearinghouse CCEE. Sales taxes alone make up between 20 and 30 percent of Brazilians' energy bill, according to Acende Institute, an energy research center. "They should tackle the taxes that make electricity in Brazil among the most expensive in the world," said Alexandre Furtado Montes, an analyst at Lopes Filho & Associados. "Prices in the open market depend on water reservoir levels." (Writing by Alonso Soto; Editing by Anthony Boadle, Jim Marshall and Andrew Hay)