UPDATE 1-Brazil shrugs off pressure over utility rate cut

Wed Nov 14, 2012 4:44pm EST

Related Topics

* Mantega says plan to slash energy costs by 20 pct will succeed

* Most companies are on board to lower rates - finance minister

* Lower energy costs is key to keep inflation in check in 2013

By Tiago Pariz and Alonso Soto

BRASILIA, Nov 14 (Reuters) - Brazil will not give in to a handful of electricity companies that are resisting a government plan to reduce the cost of energy in average by 20 percent to power up a sluggish economy, Finance Minister Guido Mantega said on Wednesday.

Mantega said only a few companies were holding out on the offer of early renewal of concessions in return for charging less for their electricity, while most utilities had signed on for the plan guaranteeing its success.

Lowering some of the world's most expensive energy costs is crucial for Brazil to keep inflation under control next year and regain the impressive economic growth rates that made it a star among emerging market nations over the last decade.

"We will not give in on the 20 percent reduction in energy costs," Mantega told reporters in Brasilia. "I'm confident that the overwhelming majority (of power companies) will opt for the option to renew their concessions."

Mantega said the government was ready to step in to guarantee electricity costs dropped next year, but he declined to say how it would do that.

President Dilma Rousseff in September asked power companies to slash their rates or risk the loss of their operating concessions when they expire between 2015 and 2017.

The companies have the right not to renew their concessions right now, keeping their current energy rates. In that case, Mantega said, the government will "somehow" make sure energy prices will fall next year. He said the Treasury could be involved in such an action, but provided no specifics.

Rousseff's plan has knocked down shares of power utilities and greatly upset energy investors, some of them have accused the government of trying to break their concession contracts in a new bid to intervene in a key sector of the economy.

Large energy companies such as Cemig, Cteep , and Cesp have threatened or already decided not to renew their concessions.

However, Brazil's largest utility, state-led Eletrobras , is on board with the plan.

Eletrobras said on Wednesday that its board has recommended that shareholders approve the government's plan to renew its hydro dam concessions.

The move is expected to reduce Eletrobras revenue and has been opposed by shareholders such as Norwegian fund Skagen, which asked the company not to renew the concessions on the new terms, according a report on Tuesday by local newspaper Valor Economico. Skagen has cut its stake in the company to less than 1 percent at the end of September from 2 percent in August.

Eletrobras shares fell 4.3 percent to 13.22 reais in Wednesday trading on the Sao Paulo stock exchange, the seventh decline in eight sessions. Eletrobras stock has lost a third of its value since Rousseff announced the plan for cheaper electricity. By contrast, shares of utilities that rejected the government offer, such as Cteep, have risen.

GOVERNMENT PRIORITY

Mantega said Brazil's energy rates need to come down next year to allow for the Brazilian economy to grow at its potential of between 4.0 and 4.5 percent per year.

The world's sixth largest economy has slowed dramatically from a two-decade high of 7.5 percent in 2010 to an expected expansion of just 1.5 percent this year.

Although economic growth is picking up speed, the strength of the recovery remains on shaky ground.

"It is important that we do this right away because the country is in a hurry," Mantega said.

Lower energy costs will boost production and investment in all sectors of the economy ranging from industries that are heavy power users like steel smelters to supermarkets and service providers, Mantega said.

Lower energy prices would also help the government ensure inflation remains in check next year, making room for the central bank to keep its benchmark interest rate at an all-time low for longer.

The central bank has estimated that lower electricity costs next year could trim about half a percentage point off inflation, which is running at 5.45 percent in the 12-month period to October. That is well above the center of the government's target of 4.5 percent, plus or minus two percentage points.

Mantega said that, by refusing to adhere to the government plan, some firms are trying to keep their "privileges," forcing the population to pay unfairly high energy prices.

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