UPDATE 1-Brazil utilities force gov't to accept smaller rate cut

Tue Dec 4, 2012 4:29pm EST

* Brazil wanted power rate cut of 20 pct

* Gov't reduces rates to 16.7 pct after utility refusals

* CEMIG and CESP keep dams out of program

BRASILIA, Dec 4 (Reuters) - The Brazilian government's goal of cutting electricity rates by a fifth suffered a setback on Tuesday as several utilities rejected President Dilma Rousseff's offer to renew expiring hydro concessions early in exchange for power rate cuts.

Average electricity rates, which are among the world's highest, will fall 16.7 percent instead of a planned 20 percent as a result of the renewal refusals, Energy Ministry Executive Secretary Marcio Zimmerman told reporters in Brasilia.

A hydro concession is a government license to operate a dam and sell the energy.

The debate over the renewals has pitted the federal government against investors and utility managers. Rousseff wants the rate cuts to boost growth in Brazil, the world's sixth-largest economy.

Her opponents say the cuts are too big and will slash revenue, profit and investment to a level that could cripple the electricity industry.

Federal government-controlled Eletrobras, Latin America's largest utility, accepted the renewals Monday. The decision to accept them caused the company's share price to fall by half since Rousseff announced the plan in September. Company shares are trading at some of their lowest levels in more than a decade.

The refusals were led by Cia Energetica de Minas Gerais and Cia Energetica de Sao Paulo, public-private utilities controlled by the Brazilian state governments of Minas Gerais and Sao Paulo. The utilities are more commonly known as CEMIG and CESP.

While CEMIG and CESP agreed to accept early renewals for part of their dam portfolio, they said could not operate the rest under the financial terms offered by the government.

When dam rights not included by the utilities in the program expire, they revert to Brazil's federal government and will be auctioned to the highest bidder, Zimmerman said.

While the government's effort to get renewals for all hydro dam concessions expiring by 2017 failed, Brazilian utilities opted to renew 100 percent of expiring electricity transmission contracts under the program, Zimmerman said.

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