UPDATE 3-Brazil cuts high electricity costs to boost economy

Tue Sep 11, 2012 7:34pm EDT

* Taxes lowered for electricity producers and distributors

* Costs cut by 16 to 28 pct for homes and businesses

* Cheaper energy should boost competitiveness of industry

* Concessions renewed for one-fifth of generating capacity

By Alonso Soto and Leonardo Goy

BRASILIA, Sept 11 (Reuters) - Brazil announced a major cut in electricity taxes on Tuesday that will lower high energy costs for industries and residential consumers, the latest attempt by President Dilma Rousseff to re-energize her country's once-booming emerging economy.

Energy Minister Edison Lobão said the tax cuts for electricity producers and distributors -- first reported by Reuters in May -- will "drastically" lower production costs and reduce power rates by up to 28 percent for industries and 16 percent for households.

"This is the biggest reduction in electricity rates that the country has ever seen," Rousseff said after signing the measures before an audience of business leaders.

"Reduced energy costs ... will improve Brazil's international standing, slow inflation and encourage investment," said Rousseff, a former energy minister. "It will benefit both the businessman and the consumer."

Consumers will begin to see lower-cost electricity a s of February 5, an Energy Ministry spokesman said.

The initiative should also aid Brazil's efforts to keep a lid on prices as the economy recovers in coming months. Finance Minister Guido Mantega said Tuesday cheaper electricity will slow inflation 0.5 and 1 percentage points next year.

Above all, reduced electricity costs will bring much-needed relief to Brazilian industries, especially in energy-intensive areas such as steel, aluminum and petrochemicals. Energy costs in Brazil are currently the world's third highest and the government action should help Brazilian companies lower sky-high production costs and improve their competitive edge abroad.

The world's sixth-largest economy has been on the brink of recession since mid-2011 as high taxes, a strong local currency and other structural problems squeeze what had previously been one of the world's most dynamic emerging economies.

Rousseff has in recent months announced targeted tax cuts for stagnant sectors such as the car industry. The cut in power costs is part of her government's strategy to reduce Brazil's high business costs and stimulate its struggling economy.

Brazil's electricity industry includes state-run companies such as Eletrobras as well as multinationals like AES Corp and GDF Suez. Hydroelectric power supplies about three-quarters of Brazil's electricity needs, with nuclear, thermal and wind power accounting for the rest.

Electricity prices are a big component of the so-called "Brazil cost" -- the mix of taxes, high interest rates, labor costs, infrastructure bottlenecks, and other issues that have caused the economy to become less competitive.

After a decade of strong performance, Brazil grew below the Latin American average in 2011 and so far this year.

If the electricity initiative is successful, Rousseff plans to use a similar blueprint to reduce taxes for other industries in coming months, officials have told Reuters.

CONCESSIONS RENEWED

In exchange for reduced power costs, Energy Minister Lobão announced the renewal of 20 concessions for electricity generators due to expire between 2015 and 2017, accounting for about one-fifth of the country's generating capacity.

The government will also renew contracts for 85,000 kilometers in transmission lines that were also expiring.

Under Brazil's current concession law, the government gets the electricity assets at the end of the concession and can auction them to the highest bidder or operate them itself.

Without renewals of these concessions, Eletrobras and other Brazilian utilities such as CESP and Cemig would have had to bid in auction to regain their operations against companies that may have more cash. Eletrobras lost a $3.5-billion bidding war last year with China's Three Gorges for Energias de Portugal.

RELIEF FOR INDUSTRIES

Cheaper electricity could not come at better time for major Brazilian industries struggling with a slow global economy.

Mining giant Vale and steelmaker CSN, two of the country's biggest electricity users, are dealing with a plunge in global demand. Iron ore has fallen by 50 percent in the last year, and steel prices have slumped by a fifth or more.

Brazil's average electricity cost of $180 per megawatt hour is exceeded only by Italy and Slovakia, the Getulio Vargas Foundation, a private think-tank, said in a 2011 study based on data from the International Energy Agency.

High electricity costs have contributed to stagnant investment and production in energy-intensive industries. Despite Brazil's bauxite and alumina resources, no new aluminum factories have been built there since 1985 and two have closed, keeping production levels stagnant, the Getulio Vargas study said. It said electricity accounts for 35 percent of the industry's production costs.

Alcoa Inc., the world's largest aluminum producer, has been in talks with the government for years trying to lower electricity costs and has considered reducing its presence in the Brazil after 50 years.

Alcoa now expects the 28 percent drop in its electricity bill to bring its production costs closer to the world average of $35 per megawatt-hour (MWh). The president of Alcoa for Latin America, Franklin Feder, said aluminum companies are currently paying between $55 and $60 per MWh in Brazil.

Paulo Skaf, president of the powerful Sao Paulo industries lobby FIESP, welcomed the electricity measures and said sectors that had become "inviable" in Brazil like aluminum would be back in business.

Investors sought shares in companies that stand to benefit from cheaper electricity, rather than the power generators themselves. On the Sao Paulo stock market Bovespa, the electricity share index erased gains during the tax cut announcement and was trading 0.49 pct lower at midday.

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