BRASILIA Feb 11 Brazil's electricity regulator ANEEL proposed on Tuesday a 4.6 percent increase in rates paid by consumers to help cover power subsidies, a move that could add pressure to already-high inflation in Latin America's top economy.
ANEEL expects a deficit of 5.6 billion reais ($2.33 billion) this year in the so-called Energy Development Account, or CDE, and that does not include the cost of using more expensive thermal energy to make up for a drop in hydroelectric output.
Last year, President Dilma Rousseff made a deal with power utilities to slash electricity prices in a bid to bolster Brazil's slow-moving economy and tame a surge in prices.
A year has passed and the economy remains fragile and inflation high, which has threatened Brazil's investment grade rating as investors worry about the country's fiscal health.
Finance Minister Guido Mantega has promised to pay for any extra energy costs to avoid an increase in consumer bills. That cost, which some media reports could reach 5 billion reais, also threatens to derail government efforts to show markets it is becoming more fiscally responsible.
The government has budgeted 9 billion reais to pay for energy costs this year. Most of that amount would be loaned to power distributors to pay for thermal energy as a severe drought has lowered water reservoir levels at hydroelectric power plants.
ANEEL's rate hike proposal will be discussed at public hearings between Feb. 13 and March 16 before a decision is made. The subsidies in the CDE cover energy distribution to the remote northern regions and lower rates for poor consumers.
If the regulator opts to hike rates by 4.6 percent it could add 0.4 percentage points to this year's inflation, said Flavio Combat, chief economist with the Concordia brokerage in Rio de Janeiro.
Combat said the rate adjustment would increase his year-end inflation forecast from 5.9 percent to 6.3 percent, very close to the official target ceiling of 6.5 percent.
High inflation is a political liability for Rousseff, who is expected to run for a second term in elections on Oct. 5.
Although annual inflation eased in January to 5.59 percent, Brazil has struggled to keep prices in check due to a combination of more public spending, a weaker local currency and robust consumption.